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Fat Products

  • Alexei Alexandrov

The economics literature generally considers products as points in some characteristics space. Starting with Hotelling, this served as a convenient assumption, yet with more products being flexible or self-customizable to some degree it makes sense to think that products have positive measure. I develop a model where ?rms can o¤er interval long 'fat' products in the spatial model of differentiation. Contrary to the standard results pro?ts of the firms can decrease with increased differentiation - there is a standard effect of lowering the incentive to cut prices, but there is also an incentive to provide more content sometimes resulting in lower profits. Consumer welfare increases unambiguously with respect to the standard model of Salop. I also find that it is profitable for firms to commit as an industry not to make fat products. If one firm is a leader and another is a follower, the leader accommodates the follower by settling for less pro?ts if differentiation is small.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1435.

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Date of creation: Nov 2006
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Handle: RePEc:nwu:cmsems:1435
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