Working Paper: CEPR ID: DP1268
Authors: Norbert Schulz
Abstract: Equilibrium prices of the variants of a differentiated commodity are shown to increase if the variants become closer substitutes, under a set of circumstances, which is by no means pathological. Rather, the underlying argument has a bearing on market prices, whenever a potential buyer does not know with certainty the characteristics of the variants for sale before inspecting them, and therefore must incur some information costs before the final purchase decision.
Keywords: substitutability; product differentiation; search goods; oligopoly
JEL Codes: 043; 083; L13; R34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average degree of substitutability (L15) | equilibrium prices (D41) |
| consumer behavior (willingness to incur information costs) (D12) | equilibrium prices (D41) |
| average degree of substitutability (L15) | aggregate demand (E00) |
| aggregate demand (E00) | equilibrium prices (D41) |
| marginal degree of substitutability (D43) | equilibrium prices (D41) |