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Functional Differentiation

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  • Sällström, Susanna
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    Abstract

    Models of product differentiation typically assume a demand for variety. This paper derives the demand for variety in a model where a representative consumer chooses how many specialised varieties to purchase for the pursuit of different activities. In contrast with previous models this generates a demand for variety that is price and income elastic. In applications to monopoly and duopoly I find that whilst a duopoly will choose efficient characteristics it will offer too many specialised varieties, whereas a monopoly will either offer excessively specialised varieties or too few specialised varieties on the assumption of no fixed costs of variety.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7187.

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    Date of creation: Feb 2009
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    Handle: RePEc:cpr:ceprdp:7187

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    Keywords: general purpose goods; product differentiation; specialised goods; variety;

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