Adv. Math. Econ. Volume 1, pp.3967 (1999)
Product differentiation and market power
Egbert Dierker and Hildegard Dierker
Institut für Wirtschaftswissenschaften, Universität Wien, Hohenstaufengasse 9, A1010 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.