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A difficulty with the address models of product differentiation

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  • Martin Peitz

    (Departamento Fundamentos del AnaÂlisis EconoÕmico, University of Alicante, E-03071 Alicante, SPAIN)

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.

Suggested Citation

  • Martin Peitz, 1999. "A difficulty with the address models of product differentiation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 717-727.
    • Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:717-727
    Note: Received: October 17, 1997; revised version: February 20, 1998
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    References listed on IDEAS

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    1. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
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    Cited by:

    1. Pia Weiß, 2001. "Product and Process Innovations in a Horizontally Differentiated Product Market," IWP Discussion Paper Series 07/2001, Institute for Economic Policy, Cologne, Germany.
    2. Peitz, Martin, 2000. "Aggregation in a Model of Price Competition," Journal of Economic Theory, Elsevier, vol. 90(1), pages 1-38, January.

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    More about this item

    Keywords

    Product differentiation; Unit demand; Heterogeneous income; Discrete choice.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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