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Title: Functional Differentiation

Author(s): Susanna Sällström

Publication Date: February 2009

Keyword(s): general purpose goods, product differentiation, specialised goods and variety

Programme Area(s): Industrial Organization

Abstract: Models of product differentiation typically assume a demand for variety. This paper derives the demand for variety in a model where a representative consumer chooses how many specialised varieties to purchase for the pursuit of different activities. In contrast with previous models this generates a demand for variety that is price and income elastic. In applications to monopoly and duopoly I find that whilst a duopoly will choose efficient characteristics it will offer too many specialised varieties, whereas a monopoly will either offer excessively specialised varieties or too few specialised varieties on the assumption of no fixed costs of variety.

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Bibliographic Reference

Sällström, S. 2009. 'Functional Differentiation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7187