 On the microeconomic foundations of linear demand for differentiated productsRabah Amir (), Philip Erickson and Jim Jin () Journal of Economic Theory, 2017, vol. 169, issue C, 641-665 Abstract: This paper provides a thorough exploration of the microeconomic foundations for the multi-variate linear demand function for differentiated products, which is widely used in industrial organization. The setting is the standard representative consumer with a quasi-linear utility function. A key finding is that strict concavity of the quadratic utility function is critical for the demand system to be well defined. Otherwise, the true demand function may be quite complex: Multi-valued, non-linear and income-dependent. We uncover failures of duality relationships between substitute products and complementary products, as well as the incompatibility between high levels of complementarity and concavity. The two-good case emerges as a special case with strong but non-robust properties. A key implication is that all conclusions derived in applied economic models via the use of linear demand that does not satisfy the Law of Demand ought to be regarded with some suspicion. Keywords: Linear demand; Gross substitutes; Gross complements; Edgeworth complements; Representative consumer; Law of Demand (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:169:y:2017:i:c:p:641-665 DOI: 10.1016/j.jet.2017.03.005 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.