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- A Difficulty With The Address Models Of Product Differentiation

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Author Info
Martin Peitz (Universidad de Alicante)

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Abstract

In models of product differentiation and location models it is implicitly assumed that consumers can afford to buy the differentiated goods in the market. I show that with income heterogeneity there are severe existence problems of a price equilibrium in models of horizontal product differentiation with unit demand because some consumers are income-constrained. The result generalizes to other models of product differentiation, search, and switching costs. I present an alternative specification of variable individual demand in which this kind of existence problem cannot arise.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-1998-21.pdf
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File Function: Fisrt version / Primera version, 1998
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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 1998-21.

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Length: 14 pages
Date of creation: Sep 1998
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:1998-21

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Related research
Keywords: product differentiation unit demand heterogenous income

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September. [Downloadable!] (restricted)
  2. Bockem, Sabine, 1994. "A Generalized Model of Horizontal Product Differentiation," Journal of Industrial Economics, Blackwell Publishing, vol. 42(3), pages 287-98, September. [Downloadable!] (restricted)
  3. Peitz, M., 1998. "Two-Stage Models of Product Differentiation with Unit-Elastic Demand," Papers 98-18, Valencia - Instituto de Investigaciones Economicas.
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  4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  5. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February. [Downloadable!] (restricted)
  6. Economides, Nicholas, 1984. "The principle of minimum differentiation revisited," European Economic Review, Elsevier, vol. 24(3), pages 345-368, April. [Downloadable!] (restricted)
  7. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  8. Peitz, Martin, 1995. "Utility maximization in models of discrete choice," Economics Letters, Elsevier, vol. 49(1), pages 91-94, July. [Downloadable!] (restricted)
  9. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Blackwell Publishing, vol. 39(4), pages 383-90, June. [Downloadable!] (restricted)
  10. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  11. Peitz, Martin, 1997. "Differentiated Bertrand duopoly with variable demand," Research in Economics, Elsevier, vol. 51(2), pages 85-100, June. [Downloadable!] (restricted)
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  12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pia Weiss, 2002. "Product and Process Innovations in a Horizontally Differentiated Product Market," Industrial Organization 0201005, EconWPA. [Downloadable!]
    Other versions:
  2. Martin Peitz, 1999. "- Aggregation In A Model Of Price Competition," Working Papers. Serie AD 1999-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
    Other versions:
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