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The Logit as a Model of Product Differentiation: Further Results and Extensions

  • Simon P. Anderson
  • Andre de Palma

There is a growing interest in using the discrete choice approach to study oligopolistic competition under product differentiation, and a prominent discrete choic model is the multinomial logit. Here we analyze various aspects of the logit in this context. We first show that the predictions of the logit are very similar to those of the well-known CES model and explain why this is so. We next discuss the existence and the uniqueness of a price equilibrium for a general version of the logit. We illustrate (using the logit) the flexibility and tractability of the discrete choic approach for two diferent problems. The first of these finds a free-entry equlibrium with multiproduct firms. The second uses the logit to construct a simple search model. We also introduce the nested logit as an oligopoly model and apply it to these two problems.

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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 913.

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Date of creation: Dec 1989
Date of revision:
Handle: RePEc:nwu:cmsems:913
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  1. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Braid, Ralph M., 1988. "Heterogeneous preferences and non-central agglomeration of firms," Regional Science and Urban Economics, Elsevier, vol. 18(1), pages 57-68, February.
  3. Anderson, Simon P. & De Palma, Andre & Thisse, Jacques-Francois, 1987. "The CES is a discrete choice model?," Economics Letters, Elsevier, vol. 24(2), pages 139-140.
  4. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques-François Thisse, 1985. "The principle of minimum differentiation holds under sufficient heterogeneity," ULB Institutional Repository 2013/1759, ULB -- Universite Libre de Bruxelles.
  5. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, . "Demand for differentiated products, discrete choice models, and the characteristics approach," CORE Discussion Papers RP 824, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Simon Anderson & Andre de Palma, 1985. "Market Equilibrium and Optimal Product Diversity: A Logit Specification," Working Papers 630, Queen's University, Department of Economics.
  7. Feenstra, R.C. & Levinsohn, J.A., 1989. "Distance, Demand And Oligopoly Pricing," Papers 342, California Davis - Institute of Governmental Affairs.
  8. ANDERSON, Simon & de PALMA, André & THISSE, Jacques-François, . "A representative consumer theory of the logit model," CORE Discussion Papers RP 805, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  14. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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  17. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  18. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
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