Horizontal_Product_Differentiation_Model - Atlas of Economic Models

Horizontal Product Differentiation Model


'Horizontal' product differentiation denotes a situation where:

  1. (Obviously!) Products are differentiated (i.e. are not perfect substitutes as in the Cournot_Model or Bertrand Model).

  2. No product is unilaterally ranked as 'better' by all consumers (at the same price).

There are two main approaches to modelling product diversity in such circumstances:

  1. Locational models (Hotelling 1929, Salop 1980) which are intended to simulate arising from some heterogeneity across consumers or products. Examples of such heterogeneity would be physical location or advertizing branding.
  2. Monopolistic competition (Chamberlin 1933, Spence 1976, Dixit and Stiglitz 1977). The modern versions at least proceed by explicitly introducing a taste for variety into the consumer utility function. For example the standard CES form has this property: $$U = u( u_{a}, (\sum_{i=1}^{i=n}q_{i}^{\beta})^{1/\beta} )$$.

Each of these is treated in a separate section: