Abstract
The paper proves the consistency of vertical and horizontal differentiation models regarding the finiteness property. In the case of constant returns, it turns out that the attitude of consumers towards products sold at marginal costs is crucial for the finiteness property to hold or not. We first prove concerning the finiteness property results with horizontal preferences consistent with results already obtained with vertical preferences. Second we prove with vertical and horizontal preferences, a new type of result relative to the existing literature: the existence of an indifferent consumer and a population unanimous w.r.t. their most preferred variant when all variants are sold at marginal cost, is sufficient to allow to an unbounded number of firms to be active. In the case of non-constant returns, it is the cost structure in a neighborhood of the zero output that drives the market structure. Results consistent with results already proved with vertical preferences, are proved with horizontal preferences. Finally, existence results with horizontal preferences are provided to show that the demonstrated properties have cases of application.
Similar content being viewed by others
References
Anderson, S.P., De Palma, A., Thisse, J.F.: Discrete Choice Theory of Product Differentiation. Cambridge: The MIT Press pp. 305–316 (1992)
Cremer H., Thisse J.F. (1991): Location models of horizontal differentiation: a special case of vertical differentiation models. J Ind Econ 39(4): 383–390
Lahmandi-Ayed R. (2000): Natural oligopolies: a vertical differentiation model. Int Econ Rev 41(4): 971–987
Lahmandi-Ayed R. (2004): Finiteness property in vertically differentiated markets: a note on locally increasing and decreasing returns. Econ Theory 23(2): 371–382
Mussa M., Rosen S. (1978): Monopoly and product quality. J Econ Theory 18, 301–317
Shaked A., Sutton J. (1983): Natural oligopolies. Econometrica 51, 1469–1484
Author information
Authors and Affiliations
Corresponding author
Additional information
The starting point of this paper is a relevant question from Elyes Jouini. I also benefitted from the comments of Jean-Marc Bonnisseau and discussions with Jacques-François Thisse. Jing-Yuan Chiou discussed the paper in the JEI2005 meeting that held in Bilbao, Spain in September 2005. Grateful thanks are due to all of them and two anonymous referees for their comments.
Rights and permissions
About this article
Cite this article
Lahmandi-Ayed, R. Finiteness property with vertical and horizontal differentiation: does it really matter?. Economic Theory 33, 531–548 (2007). https://doi.org/10.1007/s00199-006-0162-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-006-0162-y