Multi-Purpose Consumption and Functional Differntiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store?
Sallstrom Matthews, Susanna
Cambridge Working Papers in Economics
Faculty of Economics
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Sallstrom Matthews, S. (2007). Multi-Purpose Consumption and Functional Differntiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store?. https://doi.org/10.17863/CAM.5149
A very striking change in product selection over the last century has been the increased degree of specialisation of durable goods. To analyse these changes this paper introduces a new form of product differentiation called functional. It is shown that when a homogeneous population demands multiple locations (rather than consumers being heterogeneous) several standard results are reversed. A monopoly has an incentive to offer excessively specialised goods and delay innovation. It is in a duopoly that product characteristics will be efficient. Entry of a third firm will be more profitable in the fringes. Furthermore entry results in too much variety. Finally, the paper presents a novel argument in favour of bundling.
entry, innovation, optimium diversity, functional differentiation, bundling
This record's DOI: https://doi.org/10.17863/CAM.5149
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