Adv. Math. Econ. Volume 1, pp.39-67 (1999)

Product differentiation and market power

Egbert Dierker and Hildegard Dierker
Institut für Wirtschaftswissenschaften, Universität Wien, Hohenstaufengasse 9, A-1010 Vienna, Austria
Assuming symmetry across firms and constant unit costs Perloff and Salop (1985) show: If product differentiation increases, prices rise in a symmetric equilibrium. This raises the question of whether, in general, more product differentiation leads to higher market prices. Giving up the symmetry and the constant unit costs assumptions we present examples in which at least one firm lowers its equilibrium price when product differentiation increases. We formulate a model of product differentiation and state and discuss, within the theory of supermodular games, conditions ensuring that all firms raise their prices in a Nash equilibrium if product differentiation increases.