ch07 - Product Variety and Quality under Monopoly Chapter...

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Chapter 7: Product Variety and Quality under Monopoly 1 Product Variety and Quality under Monopoly
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Chapter 7: Product Variety and Quality under Monopoly 2 Introduction Most firms sell more than one product Products are differentiated in different ways horizontally goods of similar quality targeted at consumers of different types how is variety determined? is there too much variety vertically consumers agree on quality differ on willingness to pay for quality how is quality of goods being offered determined?
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Chapter 7: Product Variety and Quality under Monopoly 3 Horizontal product differentiation Suppose that consumers differ in their tastes firm has to decide how best to serve different types of consumer offer products with different characteristics but similar qualities This is horizontal product differentiation firm designs products that appeal to different types of consumer products are of (roughly) similar quality Questions: how many products? of what type? how do we model this problem?
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Chapter 7: Product Variety and Quality under Monopoly 4 A spatial approach to product variety The spatial model (Hotelling) is useful to consider pricing design variety Has a much richer application as a model of product differentiation “location” can be thought of in space (geography) time (departure times of planes, buses, trains) product characteristics (design and variety) consumers prefer products that are “close” to their preferred types in space, or time or characteristics
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Chapter 7: Product Variety and Quality under Monopoly 5 An example of product variety McDonald’s Burger King Wendy’s
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Chapter 7: Product Variety and Quality under Monopoly 6 A Spatial approach to product variety 2 Assume N consumers living equally spaced along Main Street – 1 mile long. Monopolist must decide how best to supply these consumers Consumers buy exactly one unit provided that price plus transport costs is less than V. Consumers incur there-and-back transport costs of t per mile The monopolist operates one shop reasonable to expect that this is located at the center of Main Street
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Chapter 7: Product Variety and Quality under Monopoly 7 The spatial model z = 0 z = 1 Shop 1 t x 1 Price Price All consumers within distance x 1 to the left and right of the shop will by the product 1/2 V V p 1 t x 1 p 1 + t.x p 1 + t.x p 1 + t.x 1 = V, so x 1 = (V – p 1 )/t What determines x 1 ? Suppose that the monopolist sets a price of p 1
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Quality under Monopoly 8 The spatial model 2 z = 0 z = 1 Shop 1 x 1 Price Price 1/2 V V p 1 x 1 p 1 + t.x p 1 + t.x Suppose the firm reduces the price to p 2 ? p
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ch07 - Product Variety and Quality under Monopoly Chapter...

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