Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:26: Endogenous Product Differentiation, Market Size and Prices

Shon Ferguson ()
Additional contact information
Shon Ferguson: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: Recent empirical evidence suggests that prices for many goods and services are higher in larger markets. This paper provides an explanation for this phenomenon when firms can choose how much to differentiate their products in a monopolistically competitive environment. 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. Larger markets lead to greater variety and products that are more differentiated, which provides consumers with greater welfare despite the adverse effect of product differentiation on prices. The social planner does not charge a markup, which allows it to differentiate products more than is possible in the competitive equilibrium. The model also provides an explanation for why prices do not always fall when trade is liberalized.

Keywords: Endogenous Technology; Market Size Effect; International Trade

JEL-codes: D43; F12; L13

27 pages, December 9, 2010

Full text files

wp10_26.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Sten Nyberg ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-01-23 23:38:26.