ESSAYS ON HEDONIC PRODUCT DIFFERENTIATION

The present work has, as its main goal, that of exposing how the explicit, or com- binable consumption version of the Lancasterian characteristics model, can be used to study some aspects of product differentiation and imperfect competition. The work is divided into four chapters. The first chapter provides a concise introduction of the literature on product dif- ferentiation and imperfect competition, where we highlight its gap regarding the com- binable consumption model developed by Lancaster (1966, 1971). In the second chapter we develop a simple differentiated monopoly market with heterogeneous consumers. We show that, in a model with hedonically differentiated products, where consumers display love for variety, and the market is served by a monopolist exerting its market power by directly shaping the space of marketed vari- eties, the incentive to increase product differentiation depends on the curvature of the marginal utilities which uniquely define inverse demand functions. The resulting out- come is that the allocative efficiency of the equilibrium may, or may not, be reached. In particular, when marginal utilities are convex, the resulting equilibrium is inefficient. The opposite occurs when marginal utilities are concave. The third chapter introduces strategic interaction among firms providing differen- tiated goods. In particular, we will consider an oligpolistic market where firms, given their products’ designs, compete `a la Cournot. The demand side of the economy is pop- ulated by heterogeneous consumers displaying love for variety. Essentially, the model we present can be seen as the partial-equilibrium counterpart, with differentiated goods, of the seminal model proposed Gabszewicz and Vial (1972). Given the complexities attached to the formulation of a general model, we limit ourselves in presenting a set of examples providing the functioning, the hints and the difficulties embodied in the proposed model. Finally, in the fourth chapter, we consider a simple duopoly with a representative consumer in where we study, in a two-stage game, the strategic selection of products’ designs, assuming that firms differentiate along two possible dimensions (characteris- tics). What we find is that firms’ tendency is to select the same product’s design. When entry is considered, entrants are shown to also select the same product’s design as they enter the market. For, the number of firms at the free-entry equilibrium results higher than the socially optimal number of firms.