Lecture6_proddiff - INTRO HETEROGENEITY LOCATION I...

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Unformatted text preview: INTRO HETEROGENEITY LOCATION I NDUSTRIAL ORGANISATION (2011) T OPIC 6: P RODUCT DIFFERENTIATION Nicolas de Roos 1 1 Discipline of Economics University of Sydney INDUSTRIAL ORGANISATION (2011) TOPIC 6: PRODUCT DIFFER INTRO HETEROGENEITY LOCATION O UTLINE INTRODUCTION DEMAND FOR DIFFERENTIATED PRODUCTS Demand LOCATION MODELS Introduction The linear city The circular city INDUSTRIAL ORGANISATION (2011) TOPIC 6: PRODUCT DIFFER INTRO HETEROGENEITY LOCATION I NTRODUCTION Competing products often have distinguishing characteristics • physical differences • perceived differences • eg pharmaceuticals, home brands • service quality • location Products must be sufficiently closely related to be in the same market • ie (some) consumers would substitute between products if relative prices shifted Product differentiation provides firms with market power • firms have downward sloping demand curves • this provides one explanation for observed prices above marginal costs if firms set prices INDUSTRIAL ORGANISATION (2011) TOPIC 6: PRODUCT DIFFER INTRO HETEROGENEITY LOCATION O UTLINE INTRODUCTION DEMAND FOR DIFFERENTIATED PRODUCTS Demand LOCATION MODELS Introduction The linear city The circular city INDUSTRIAL ORGANISATION (2011) TOPIC 6: PRODUCT DIFFER INTRO HETEROGENEITY LOCATION D EMAND In homogeneous product models, demand depended only on aggregate output. With differentiated products, demand now depends on the prices of all related products • p i = p i ( q 1 , q 2 , . . . , q n ) • q i = q i ( p 1 , p 2 , . . . , p n ) For example, suppose firms i and j produce imperfectly substitutable products q i = A- bp i + dp j How does this demand curve compare with the Bertrand model? INDUSTRIAL ORGANISATION (2011) TOPIC 6: PRODUCT DIFFER INTRO HETEROGENEITY LOCATION E XAMPLE Consider a two firm example Demand and cost conditions • demand: q i = 100- 2 p i + p j , for i , j = 1 , 2 • costs: C i ( q i ) = 10 q i , for i = 1 , 2 We can solve this problem in the usual way • find reaction functions for each firm...
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This note was uploaded on 10/28/2011 for the course ECOS 3005 taught by Professor Douglas during the Three '10 term at University of Sydney.

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Lecture6_proddiff - INTRO HETEROGENEITY LOCATION I...

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