Horizontal Product Differentiation with Outside Option: What Determines Attainable Maximum, Minimum and Local Monopoly?
Posted: 17 Jun 2006
Date Written: July 2004
Abstract
Using a general model that allows for outside option and consumer heterogeneity, we show that, when consumers are uniformly distributed in a unit interval, the critical determinant of the extent of attainable horizontal differentiation is the maximum value of their reservation price. When it is suffciently large, maximum differentiation occurs. When the maximum value of the reservation price is relatively small and the \target area for each firm is the entire unit interval, minimum attainable differentiation results. When the \target areas of the firms do not overlap and the maximum reservation price is small, local monopoly is the equilibrium outcome.
JEL Classification: D43, L13
Suggested Citation: Suggested Citation