CAUDEX QUINTUS

Abstract

The Bertrand model for duopoly with close substitutes suggested in Chap. 5 was based on Kelvin Lancaster’s restructured demand theory where not the marketed commodities, but their (metric) performance scores were entered in the utility functions. The marketed commodities were hence considered as bundles of such properties, designed by the producers. Lancaster assumed a simple linear structure for the connection between commodities and their properties. This way of seeing things provides a unique possibility to get a working definition of close substitutes, and to get a solid basis for modelling Bertrand style oligopoly. As we saw, pricing of substitutes with given design, could provide for some complex dynamics. However, the approach admits another perspective, i.e., not only competition through pricing, but also through product design. The Lancaster approach admits the calculation of shadow prices for the properties. The competitors can thus at each stage calculate the value of their current design, and they may compare it with the optimal design in each market situation, i.e., the design that given the technical production opportunities represents maximum value of the product. If this indicates that their product design is outmoded, they may go for a change. Redesign is costly and some conservatism is called for before a competitor goes for it. However, design provides for an alternative means of competition, and it might be interesting to explore different scenarios. Do the competitors converge on an identical design, or rather tend to different designs? Convergence on periodicity opens an even more interesting perspective; recurrence in design, “fashion cycles” to use a popular term from quite different kinds of study.