Models of Product Differentiation

Abstract

Product differentiation is one of the pervasive features of modern economies.¹ On entering a department store, say, a customer may choose between a variety of detergents, of dinner plates and of dishwashers. In each case, there is a set of products which may be considered to supply broadly the same needs, for example laundering clothes, but which are different in detail. Since customers differ in their tastes and incomes, they are most likely to exhibit preferences as between the varieties. Modelling product differentiation involves specifying supply and demand sides to the relationship. The aim is to obtain insights into behaviour and performance which cannot be gleaned from homogeneous product models.

This chapter is based upon my (1989) survey paper ‘Models of Product Differentiation’ which appeared in the Bulletin of Economic Research, 41, pp. 1–27. The original paper was written whilst I was spending a year at the University of Sydney. I am grateful to Roger Sherman, Noel Gaston, and other participants at the University of Sydney day workshop in March 1988, and an anonymous referee for the Bulletin, for helpful comments on an earlier draft.