Working Paper Series
Endogenous Product Differentiation, Market Size and Prices
Abstract: Recent empirical evidence suggests that prices for some
goods and services are higher in larger markets. This paper provides a
demand-side explanation for this phenomenon when firms can choose how much
to differentiate their products in a model of monopolistic competition with
horizontal product differentiation. The model proposes that consumers’ love
of variety makes them more sensitive to product differentiation efforts by
firms, which leads to higher prices in larger markets. At the same time,
endogenous product differentiation modeled in this way can lead to a
positive and concave relationship between market size and entry.
Keywords: Endogenous Technology; Entry; Market Size Effect; International Trade; Monopolistic Competition; (follow links to similar papers)
JEL-Codes: D43; F12; L13; (follow links to similar papers)
27 pages, August 12, 2011
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