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Competition with targeted product design: Price, variety, and welfare

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  • González-Maestre, Miguel
  • Granero, Lluís M.

Abstract

We consider the price and welfare effects of competition in targeted product design, in the context of the Salop circle model. Changes in product design lead to demand rotations that set the stage for our analysis. With an exogenous number of firms, we show that the degree of targeted product design tends to increase with the number of firms. Moreover, under reasonable conditions, price-increasing competition takes place, for intermediate levels of the number of firms. This effect is associated with the possibility of lower consumer welfare. With endogenous firm entry, an interesting insight from our analysis is that in some situations an increase in market size or a technological progress that reduces entry costs both might reduce consumers’ welfare.

Suggested Citation

  • González-Maestre, Miguel & Granero, Lluís M., 2018. "Competition with targeted product design: Price, variety, and welfare," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 406-428.
    • Handle: RePEc:eee:indorg:v:59:y:2018:i:c:p:406-428
    DOI: 10.1016/j.ijindorg.2018.02.009
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    References listed on IDEAS

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    Cited by:

    1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2023. "Targeted Product Design," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 157-186, May.
    2. Evelyn O. Smith & Jeffrey D. Shulman, 2022. "Product diversion by vertically differentiated firms," Production and Operations Management, Production and Operations Management Society, vol. 31(5), pages 1928-1939, May.
    3. González-Maestre, Miguel & Granero, Lluís M., 2020. "Excessive vs. insufficient entry in spatial models: When product design and market size matter," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 27-35.
    4. Burak Dindaroglu, 2023. "Product design in monopolistic competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 471-488, September.

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    More about this item

    Keywords

    Price-increasing competition; Welfare; Targeted product design; Generic product design;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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