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Social interactions, product differentiation and discontinuity of demand

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  • Pigeard de Almeida Prado, Fernando
  • Belitsky, Vladimir
  • Ferreira, Alex Luiz

Abstract

We propose a discrete choice model of socially interacting consumers choosing between two product variants. The model shows that the discontinuity of demand as well as the demand polarization proposed by Becker (1991), A Note on Restaurant Pricing and Other Examples of Social Influences on Price, depend crucially on the heterogeneity of consumers’ preferences and on the level of product differentiation. When the two products are sufficiently similar, it turns out that the market is shared asymmetrically as suggested by Becker (1991). By contrast, when the products are different and the preferences of the consumers are sufficiently heterogeneous, the market is shared symmetrically as in Hotelling’s (1929) model.

Suggested Citation

  • Pigeard de Almeida Prado, Fernando & Belitsky, Vladimir & Ferreira, Alex Luiz, 2011. "Social interactions, product differentiation and discontinuity of demand," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 642-653.
    • Handle: RePEc:eee:mateco:v:47:y:2011:i:4:p:642-653
    DOI: 10.1016/j.jmateco.2011.09.003
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    References listed on IDEAS

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    Cited by:

    1. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.

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