Discrete Choice Theory of Product Differentiation

by Anderson, Simon P.; De Palma, Andre; Thisse, Jacques-Francois

• ISBN13: 9780262011280
• ISBN10: 026201128X
• Format: Hardcover
• Copyright: 1992-10-16
• Publisher: MIT PR

Summary

Product differentiation - in quality, packaging, design, color, and style - has an important impact on consumer choice. It also provides a rich source of data that has been largely unexplored because there has been no generally accepted way to model the information available. This important study shows that an understanding of product differentiation is crucial to understanding how modern market economies function and that differentiated markets can be analyzed using discrete choice models of consumer behavior. It provides a valuable synthesis of existing, often highly technical work in both differentiated markets and discrete choice models and extends this work to establish a coherent theoretical underpinning for research in imperfect competition. The discrete choice approach provides an ideal framework for describing the demands for differentiated products and can be used for studying most product differentiation models in the literature. By introducing extra dimensions of product heterogeneity, the framework also provides richer models of firm location. Discrete Choice Theory of Product Differentiation introduces students and researchers to the field, starting at the beginning and moving through to frontier research. The first four chapters detail the consumer-theoretic foundations underlying choice probability systems (including an overview of the main models used in the psychological theory of choice), while the next four chapters apply the probabilistic choice approach to oligopoly models of product differentiation, product selection, and location choice. The final chapter suggests various extensions of the models presented as well topics for further research. Simon P. Anderson is Associate Professor of Economics at the University of Virginia. Andreacute; de Palma is Professor of Marketing at the University of Geneva. Jacques-Franccedil;ois Thisse is Professor of Economics at the University of Paris I-Sorbonne, and is on the staff of the Center for Operations Research and Econometrics in Louvain-la-Neuve, Belgium.

Table of Contents

List of Tables	xi
List of Figures	xiii
Foreword	xv
Daniel McFadden
Acknowledgments	xix
Introduction	1	(12)
Product Differentiation and Discrete Choice Models	1	(4)
Some Basic Themes	5	(5)
Organization of the Book	10	(3)
Review of Discrete Choice Models	13	(50)
Introduction	13	(1)
Models with Discrete Responses	14	(3)
Foundations of Discrete Choice Models	17	(3)
Models with Stochastic Decision Rules	20	(9)
Models with Stochastic Utility	29	(10)
The Multinomial Logit	39	(6)
Generalizations of the Multinomial Logit	45	(4)
Stochastic Dependency among Alternatives	49	(3)
Conclusions	52	(1)
Appendix	53	(10)
The Representative Consumer Approach	63	(38)
Introduction	63	(3)
Discrete Choice Models and the Demand for Differentiated Products	66	(3)
Reinterpretation of Demand with a Continuum of Consumers	69	(1)
A Representative Consumer Theorem for Discrete Choice Models	70	(6)
The Multinomial Logit Representative Consumer	76	(4)
The Logit Representative Consumer with Endogenous Total Consumption	80	(5)
The CES Representative Consumer Model	85	(5)
Conclusions	90	(1)
Appendix	91	(10)
The Address Approach	101	(30)
Introduction	101	(1)
Description of the Address Model	102	(3)
An Address Theorem for Discrete Choice Models	105	(13)
Some Applications	118	(3)
The CES as an Address Model	121	(4)
Conclusions	125	(1)
Appendix	126	(5)
A Synthesis of Alternative Preference Foundations of Product Differentiation	131	(12)
Introduction	131	(1)
A Three-Way Synthesis	132	(1)
The Alternative Interpretations of the Hotelling Model	133	(2)
The Logit and CES Models	135	(3)
Comparison of Parameters: A Synthesis of the Alternative Approaches for the Logit and CES	138	(1)
Conclusions	139	(4)
Oligopoly with Product Differentiation	143	(76)
Introduction	143	(3)
Models of Product Differentiation	146	(14)
Existence of a Price Equilibrium	160	(25)
Properties of Short-Run and Long-Run Equilibria	185	(12)
Market Equilibrium and Optimum Product Diversity	197	(15)
Conclusions	212	(1)
Appendix	213	(6)
Oligopoly and the Logit Model	219	(54)
Introduction	219	(2)
The Basic Logit Oligopoly Model	221	(5)
Optimum and Equilibrium Product Diversity: The Logit and the CES	226	(3)
The Logit with an Outside Alternative	229	(7)
The Logit and Quality Choice	236	(10)
A Logit Model with Search	246	(2)
Multiproduct Oligopoly: A Nested Logit Approach	248	(9)
Network Externalities with Differentiated Products	257	(5)
Conclusions	262	(2)
Appendix	264	(9)
Product Selection, Location Choice, and Spatial Pricing	273	(70)
Introduction	273	(2)
Locational Competition	275	(16)
Product Selection and Price Competition	291	(29)
Spatial Price Policies and Location	320	(20)
Conclusions	340	(3)
Spatial Competition and the Logit Model	343	(50)
Introduction	343	(1)
Probabilistic Discrete Choice Approach and Spatial Competition	344	(7)
Competition over Locations	351	(12)
Location Choice under Mill Pricing	363	(12)
Market Equilibrium and Optimum under Alternative Spatial Price Policies	375	(9)
Conclusions	384	(1)
Appendix	385	(8)
Further Directions	393	(6)
Glossary	399	(2)
References	401	(16)
Index	417