DP15708 Targeted product design

Author(s): Heski Bar-Isaac, Guillermo Caruana, Vicente Cuñat
Publication Date: January 2021
Date Revised: July 2021
JEL(s): D42, D43, M31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15708

We present a model of product design. In our framework, there is an inherent trade-off associated with choosing between broad or niche designs. More-targeted designs are able to excite specific types of consumers, but at the cost of alienating others. We adapt the familiar Salop (1979) circle by allowing firms to locate on the interior. In contrast to previous research that exogenously assumed extreme designs, we provide conditions that ensure extreme or intermediate designs in monopoly, monopolistic competition, and duopoly. We use the framework to qualify earlier findings in the literature and support the robustness of others.