Multi-Dimensional Product Differentiation
University of Oklahoma - Department of Economics
February 4, 2013
We examine the issue of product differentiation using a multi-dimensional model with general consumer distribution. We consider both firm location and unit transport cost. First, equilibrium prices can increase or decrease with unit transport cost. In particular, a change in unit transport cost has a rotating effect on equilibrium prices in our multi-dimensional model, but this effect is absent in one-dimensional models. Second, there may exist no equilibrium where firms maximize differentiation on one dimension but minimize differentiation on other dimensions. Instead, there may exist equilibrium where firms choose intermediate locations, contrary to the common findings in existing studies which assume uniform distribution.
Number of Pages in PDF File: 36
Keywords: Multi-dimensional product differentiation, Unit transport cost, Location choice
JEL Classification: D43, L13
Date posted: December 21, 2011 ; Last revised: February 8, 2013
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