On Firms' Preferences for Product Differentiation

Economics Bulletin, 2005

Rajeev K. Tyagi

Abstract

We examine firms' preferences for product differentiation when a firm has a demand-side and/or a cost-side advantage over its competitor. We show that if the magnitude of these advantages is small, then both firms prefer more differentiated products. However, if the magnitude of demand-side (cost-side) advantage is larger, then only the advantaged (disadvantaged) firm prefers more differentiated products.

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