Assuming asymmetry across firms and constant unit costs Perloff and Salop (1985) show: If product differentiation increases, the prices rise in a symmetric equilibrium. This raise the question of whether, in general, more product differentiation leads to higher market prices. Giving up the symmetry and the constant unit costs assumptions we present examples in which at least one firm lowers its equilibrium price when product differentiation increases. We formulate a model of product differentiation and state and discuss, within the theory of supermodular games, conditions ensuring that all firms raise their prices in a Nash equilibrium if product differentiation increases.
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Paper provided by Washington St. Louis - School of Business and Political Economy in its series Papers with number
9804.
Find related papers by JEL classification: L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General