DP15708 Targeted product design
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.