Ruhr Economic Papers

Ruhr Economic Papers #92

Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models

by Yiquan Gu and Tobias Wenzel

RGS Econ and TU Dortmund, 03/2009, 26 S./p., 8 Euro, ISBN 978-3-86788-103-6

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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.

JEL-Classification: L11, L13

Keywords: Demand elasticity; spatial models; excess entry theorem

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