Product variety, price elasticity of demand and fixed cost in spatial models

Posted by D. Daniel Sokol

Yiquan Gu, Technische Universit¨at Dortmund and Tobias Wenzel, Universit at Erlangen-Nurnberg determine Product variety, price elasticity of demand and fixed cost in spatial models.

ABSTRACT: This paper explores the implications of price-dependent demand in spatial models of product differentiation. We introduce consumers with a quasi-linear utility function in the framework of the Salop (1979) model. We show that the so-called excess entry theorem relies critically on the assumption of completely inelastic demand. Our model is able to produce excessive, insufficient, or optimal product variety. A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided