Endogenous Product Differentiation, Market Size and Prices

Shon Ferguson

No 878, Working Paper Series from Research Institute of Industrial Economics

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 (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2011-08-12
New Economics Papers: this item is included in nep-bec, nep-com, nep-int, nep-mkt and nep-tid
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Related works:
Journal Article: Endogenous Product Differentiation, Market Size and Prices (2015)
Working Paper: Endogenous Product Differentiation, Market Size and Prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0878

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