DP1268 Are Markets More Competitive if Commodities are Closer Substitutes?

Author(s): Norbert Schulz
Publication Date: November 1995
Keyword(s): Oligopoly, Product Differentiation, Search Goods, Substitutability
JEL(s): D43, D83, L13, R34
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1268

Equilibrium prices of the variants of a differentiated commodity are shown to increase if the variants become closer substitutes, under a set of circumstances, which is by no means pathological. Rather, the underlying argument has a bearing on market prices, whenever a potential buyer does not know with certainty the characteristics of the variants for sale before inspecting them, and therefore must incur some information costs before the final purchase decision.