Multi-Purpose Consumption and Functional Differentiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store?

Susanna E. Sällström Matthews

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: A very striking change in product selection over the last century has been the increased degree of specialisation of durable goods. To analyse these changes this paper introduces a new form of product differentiation called functional. It is shown that when a homogeneous population demands multiple locations (rather than consumers being heterogeneous) several standard results are reversed. A monopoly has an incentive to offer excessively specialised goods and delay innovation. It is in a duopoly that product characteristics will be efficient. Entry of a third firm will be more profitable in the fringes. Furthermore entry results in too much variety. Finally, the paper presents a novel argument in favour of bundling.

Keywords: entry; innovation; optimum diversity; functional differentiation; bundling (search for similar items in EconPapers)
JEL-codes: D42 D43 L11 O31 (search for similar items in EconPapers)
Pages: 29
Date: 2007-05
New Economics Papers: this item is included in nep-com and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0727

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