Product differentiation is pervasive in markets. It is at the heart of structural empiricism and it smoothes jagged behaviour that causes paradoxical outcomes in several theoretical models. Firms differentiate their products to avoid ruinous price competition. Representative consumer, discrete choice and location models are not necessarily inconsistent, but performance depends crucially on the degree of localization of competition. With (symmetric) global competition, rents are typically small and market variety near optimal. With local competition, profits may be protected because entrants must find profitable niches. These rents lead firms to competitively dissipative them, and performance may be poor.
KeywordsBertrand competition Bertrand paradox Business stealing Chain linking Characteristics Circle model Constant elasticity of substitution (CES) model Diamond paradox Discrete choice models Endogenous growth General probit model Horizontal and vertical differentiation Intra-industry trade Local competition Location models Market power Menu costs Monopolistic competition Nested logit model Network externalities New Keynesian macroeconomics Product differentiation Quality ladders Representative consumer models Spatial competition Vertical differentiation
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