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Functional Differentiation

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  • Sällström, Susanna

Abstract

Models of product differentiation typically assume a demand for variety. This paper derives the demand for variety in a model where a representative consumer chooses how many specialised varieties to purchase for the pursuit of different activities. In contrast with previous models this generates a demand for variety that is price and income elastic. In applications to monopoly and duopoly I find that whilst a duopoly will choose efficient characteristics it will offer too many specialised varieties, whereas a monopoly will either offer excessively specialised varieties or too few specialised varieties on the assumption of no fixed costs of variety.

Suggested Citation

  • Sällström, Susanna, 2009. "Functional Differentiation," CEPR Discussion Papers 7187, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7187
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    References listed on IDEAS

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    More about this item

    Keywords

    general purpose goods; product differentiation; specialised goods; variety;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • 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

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