TASTE FOR VARIETY, TASTE FOR NOVELTY AND PRICE BEHAVIOUR

Silvia Bertarelli and Roberto Censolo

Metroeconomica, 2006, vol. 57, issue 1, 93-111

Abstract: In this paper we propose a formulation of preferences that exhibit both love for variety and love for novelty. This enables us to investigate the effects of ageing on imperfect substitutes, as they became progressively old‐fashioned, due to the obsolescence of their aesthetic features. First, we assume that the industry is divided into several submarkets, each dominated by a monopolist producing a variety of a given vintage. We show that prices decrease, and the evolution of demand determines the equilibrium number of varieties at the point where the oldest vintage firm earns zero profits. Second, under a free entry condition assumption, the lifetime horizon of each variety will be characterized by decreasing prices accompanied by increasing demand levels.

Date: 2006
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