Working Paper No. 878

Endogenous Product Differentiation, Market Size and Prices

Published: August 12, 2011Pages: 27Keywords: Endogenous Technology; Entry; Market Size Effect; International Trade; Monopolistic CompetitionJEL-codes: D43; F12; L13
Published version

Endogenous Product Differentiation, Market Size and Prices Shon Ferguson


Recent empirical evidence suggests that prices for some goods and services are higher in larger markets. This paper provides a demand-side explanation for this phenomenon when firms can choose how much to differentiate their products in a model of monopolistic competition with horizontal product differentiation. The model proposes that consumers’ love of variety makes them more sensitive to product differentiation efforts by firms, which leads to higher prices in larger markets. At the same time, endogenous product differentiation modeled in this way can lead to a positive and concave relationship between market size and entry.
 

Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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