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Microfoundations for the Linear Demand Product Differentiation Model, with Applications


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  • Stephen Martin


This paper shows (1) that the Spence-Dixit-Vives model of linear demand for differentiated varieties is implied if supplies of substitutes reduce individual consumers' reservation prices as indicated in the paper, (2) that for the micro-foundation-based version SDV demand and endogenous sunk costs, the equilibrium number of varieties is independent of the number of consumers in the market and the marginal cost of a variety of unit quality, and (3) that with endogenous sunk cost, if demand does not expand with the number of varieties (as in the SDV model), the equilibrium number of varieties is unchanged, but equilibrium qualities and quantities purchased are less, all else equal.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1221.

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Length: 27 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:pur:prukra:1221

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Keywords: product differentiation; micro foundations; oligopoly; Cournot; endogenous sunk cost;

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Cited by:
  1. Stephen Martin & Jan Vandekerckhove, 2010. "Market Performance Implications of the Transfer Price Rule," Purdue University Economics Working Papers, Purdue University, Department of Economics 1238, Purdue University, Department of Economics.


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