Discrete Choice Theory of Product Differentiation
448 pp., 6 x 9 in,
- Published: October 16, 1992
This important study shows that an understanding of product differentiation is crucial to understanding how modern market economies function and that differentiated markets can be analyzed using discrete choice models of consumer behavior.
Product differentiation - in quality, packaging, design, color, and style - has an important impact on consumer choice. It also provides a rich source of data that has been largely unexplored because there has been no generally accepted way to model the information available. This important study shows that an understanding of product differentiation is crucial to understanding how modern market economies function and that differentiated markets can be analyzed using discrete choice models of consumer behavior. It provides a valuable synthesis of existing, often highly technical work in both differentiated markets and discrete choice models and extends this work to establish a coherent theoretical underpinning for research in imperfect competition.The discrete choice approach provides an ideal framework for describing the demands for differentiated products and can be used for studying most product differentiation models in the literature. By introducing extra dimensions of product heterogeneity, the framework also provides richer models of firm location. Discrete Choice Theory of Product Differentiation introduces students and researchers to the field, starting at the beginning and moving through to frontier research. The first four chapters detail the consumer-theoretic foundations underlying choice probability systems (including an overview of the main models used in the psychological theory of choice), while the next four chapters apply the probabilistic choice approach to oligopoly models of product differentiation, product selection, and location choice. The final chapter suggests various extensions of the models presented as well topics for further research.
This book provides a valuable and insightful use of random choice behavior in the analysis of the Hotelling-Lancaster style differentiated product markets. Not only is theory importantly advanced, it is advanced in a way that should greatly aid in empirical analysis.
Professor Jim Friedman, Department of Economics, Northwestern University
Discrete choice theory originated in travel demand studies in the early sixties. Since then, the power of this approach has been recognized and it has been elaborated as a theoretical and empirical tool for studying urban economies and housing markets. In this book, Anderson, de Palma and Thisse take another step whcih is crucial in realizing the full value of discrete choice theory: they show how this approach can be used to study almost all important aspects of a market with differentiated products. Their contribution is important in that it links discrete choice theory with the theory of industrial organization.
Professor Alex Anas, Chair, Department of Economics State University of New York at Buffalo
The authors have done a herculean and masterful job of bringing together the literature on discrete choice models with that of products differentiation. They are meticulou in laying out all of the intermediate mathematical steps in making their formula arguments. This is the kind of text from which I would love to teach. While the present version is sufficiently timely that it represents state-of-the art research, in the years to come students will find it invaluable in making the literature accesible.
Barry Nalebuff, Professor of Economics and Management, Yale School of Organization and Management