Class 10
Product Differentiation
Vertical vs horizontal differentiation
Natural product differentiation ve strategic
pr. Diff.
– Geographic variation
– New technology
– Brands and trademarks
– National differences
– Consumer tastes and preferences
Monopolistic Competition
The socially optimal amt. Of product
differentiation
Tangency solution
For the purposes of examning the welfare
implicatins of product differentiation, we
interpret the pre entry equilibrium. When
representative firm is the only firm.
Figure 2.16 Short-run pre-entry and post-entry equilibrium in monopolistic
competition
Necessary to determine the implications of
product differentiation.
Implications of producer surplus or
oabormal profit and for total CS as the
number of firms increase from N=1 to N2.
Figure 12.1 Monopolistic competition: too much product differentiation
Lancaster’ Product Characteristics
model
Bundles of characteristics
Figre 12.3
Figure 12.3 Lancaster’s product characteristics model
Hotelling’s Location Model
Products are identical
If all firms charge the same price,
consumers will purchase from the market
Case studies 12.2 and 12.3
Product characteristics model
Figure 12.6 Product characteristic space for breakfast cereals
Salop’s Location Model
Modified version of the Hotelling model
Consumers as located around the
circumference
Both location and price are endogenous
Figure 12.13 Salop’s location model with three firms
Figure 12.15 Salop’s location model: firm A’s demand function