IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/913.html
   My bibliography  Save this paper

The Logit as a Model of Product Differentiation: Further Results and Extensions

Author

Listed:
  • Simon P. Anderson
  • Andre de Palma

Abstract

There is a growing interest in using the discrete choice approach to study oligopolistic competition under product differentiation, and a prominent discrete choic model is the multinomial logit. Here we analyze various aspects of the logit in this context. We first show that the predictions of the logit are very similar to those of the well-known CES model and explain why this is so. We next discuss the existence and the uniqueness of a price equilibrium for a general version of the logit. We illustrate (using the logit) the flexibility and tractability of the discrete choic approach for two diferent problems. The first of these finds a free-entry equlibrium with multiproduct firms. The second uses the logit to construct a simple search model. We also introduce the nested logit as an oligopoly model and apply it to these two problems.

Suggested Citation

  • Simon P. Anderson & Andre de Palma, 1989. "The Logit as a Model of Product Differentiation: Further Results and Extensions," Discussion Papers 913, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:913
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/913.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 217-235.
    2. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-640, May.
    3. Jeffrey M. Perloff & Steven C. Salop, 1985. "Equilibrium with Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(1), pages 107-120.
    4. Simon Anderson & Andre de Palma, 1985. "Market Equilibrium and Optimal Product Diversity: A Logit Specification," Working Paper 630, Economics Department, Queen's University.
    5. Feenstra, R.C. & Levinsohn, J.A., 1989. "Distance, Demand, And Oligopoly Pricing," Working Papers 245, Research Seminar in International Economics, University of Michigan.
    6. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
    7. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
    8. Braid, Ralph M., 1988. "Heterogeneous preferences and non-central agglomeration of firms," Regional Science and Urban Economics, Elsevier, vol. 18(1), pages 57-68, February.
    9. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    10. Simon P. Anderson & André De Palma & Jacques-François Thisse, 1989. "Demand for Differentiated Products, Discrete Choice Models, and the Characteristics Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 21-35.
    11. repec:ulb:ulbeco:2013/1759 is not listed on IDEAS
    12. Kenneth E. Train & Daniel L. McFadden & Moshe Ben-Akiva, 1987. "The Demand for Local Telephone Service: A Fully Discrete Model of Residential Calling Patterns and Service Choices," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 109-123, Spring.
    13. Colin Lawrence & Pablo T. Spiller, 1983. "Product Diversity, Economies of Scale, and International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 63-83.
    14. de Palma, A, et al, 1985. "The Principle of Minimum Differentiation Holds under Sufficient Heterogeneity," Econometrica, Econometric Society, vol. 53(4), pages 767-781, July.
    15. Anderson, Simon Peter & de Palma, Andre & Thisse, Jacques-Francois, 1988. "A Representative Consumer Theory of the Logit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 461-466, August.
    16. Roger W. Koenker & Martin K. Perry, 1981. "Product Differentiation, Monopolistic Competition, and Public Policy," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 217-231, Spring.
    17. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
    18. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    19. Feenstra, Robert C & Judd, Kenneth L, 1982. "Tariffs, Technology Transfer, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1142-1165, December.
    20. Michael Sattinger, 1984. "Value of an Additional Firm in Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(2), pages 321-332.
    21. Anderson, Simon P. & De Palma, Andre & Thisse, Jacques-Francois, 1987. "The CES is a discrete choice model?," Economics Letters, Elsevier, vol. 24(2), pages 139-140.
    22. Paul Krugman, 1982. "Trade in Differentiated Products and the Political Economy of Trade Liberalization," NBER Chapters, in: Import Competition and Response, pages 197-222, National Bureau of Economic Research, Inc.
    23. Anderson, S. & De Palma, A. & Thisse, J.-F., 1987. "Demand for differentiated products, discrete choice models, and the address appoach," LIDAM Discussion Papers CORE 1987002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    24. Simon P. Anderson & André De Palma, 1988. "Spatial Price Discrimination with Heterogeneous Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 573-592.
    25. repec:fth:michin:245 is not listed on IDEAS
    26. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Amina Enkhbold, 2023. "Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance," Staff Working Papers 23-35, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    2. Rhee, Byong-Duk, 2006. "First-mover disadvantages with idiosyncratic consumer tastes along unobservable characteristics," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 99-117, January.
    3. Allen, Beth & Thisse, Jacques-Francois, 1992. "Price Equilibria in Pure Strategies for Homogeneous Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 63-81, Spring.
    4. Anderson, Simon P. & de Palma, Andre, 1999. "Reverse discrete choice models," Regional Science and Urban Economics, Elsevier, vol. 29(6), pages 745-764, November.
    5. Anderson, Simon P. & de Palma, Andre, 2000. "From local to global competition," European Economic Review, Elsevier, vol. 44(3), pages 423-448, March.
    6. Anderson, Simon P & de Palma, Andre, 1992. "Multiproduct Firms: A Nested Logit Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 261-276, September.
    7. Verboven, F.L., 1994. "International price discrimination in the European car market : An econometric model of oligopoly behavior with product differentiation," Other publications TiSEM 7686c65c-87d5-4b2c-b1d7-f, Tilburg University, School of Economics and Management.
    8. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    10. Jan Witajewski-Baltvilks, 2018. "Green Growth and Taste Heterogeneity," IBS Working Papers 07/2018, Instytut Badan Strukturalnych.
    11. Mossay, Pascal & Shin, Jong Kook & Smrkolj, Grega, 2022. "Quality Differentiation and Spatial Clustering among Restaurants," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    12. Anderson, Simon & Baik, Alicia & Larson, Nathan, 2015. "Personalized pricing and advertising: An asymmetric equilibrium analysis," Games and Economic Behavior, Elsevier, vol. 92(C), pages 53-73.
    13. Blavatskyy, Pavlo, 2018. "Oligopolistic price competition with a continuous demand," Mathematical Social Sciences, Elsevier, vol. 93(C), pages 123-131.
    14. Margaret Aksoy-Pierson & Gad Allon & Awi Federgruen, 2013. "Price Competition Under Mixed Multinomial Logit Demand Functions," Management Science, INFORMS, vol. 59(8), pages 1817-1835, August.
    15. Ralph Braid, 2013. "The locations of firms on intersecting roadways," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(3), pages 791-808, June.
    16. Tan, Guofu & Yuan, Lasheng, 2003. "Strategic incentives of divestitures of competing conglomerates," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 673-697, May.
    17. J. Peter Neary, 2000. "Monopolistic Competition and International Trade Theory," Working Papers 200025, School of Economics, University College Dublin.
    18. A. de Palma & O. Sanchez, 1998. "Accessibilité dans un système de transport en environnement concurrentiel," THEMA Working Papers 98-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    19. Gupta, Barnali & Lai, Fu-Chuan & Pal, Debashis & Sarkar, Jyotirmoy & Yu, Chia-Ming, 2004. "Where to locate in a circular city?," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 759-782, June.
    20. Rhee, Byong-Duk, et al, 1992. "Restoring the Principle of Minimum Differentiation in Product Positioning," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 475-505, Fall.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:913. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fran Walker (email available below). General contact details of provider: https://edirc.repec.org/data/cmnwuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.