Discrete choice theory of product differentiation.

*(English)*Zbl 0857.90018
Cambridge, MA: MIT Press, xxii, 423 p. (1992).

This book develops the theory of oligopoly with product differentiation, by employing the discrete choice approach, which has been used mainly in the psychological theory of choice. Successful use is made of the new analytical tool for synthesizing existing results in the theory of industrial organization and extending them. Reviewing some discrete choice models, the authors convincingly show that this approach provides a powerful framework for describing the demands for differentiated products.

The book can be divided into three parts. The first part, consisting of Chapters 2 through 5, goes into the details of the consumer-theoretic foundations underlying choice probability systems. Chapter 2 traces the development of discrete choice theory. The next three chapters argue that the discrete choice framework can consolidate the two main approaches to modelling demand for differentiated products: the representative consumer approach and the address or characteristics approach.

The second part, consisting of Chapters 6 through 9, applies the probabilistic choice approach to oligopoly models of product differentiation. Chapter 6 establishes equilibrium existence in discrete choice models and Chapter 7 elaborates the question of equilibrium versus optimal product diversity in the special framework of the multinominal logit model. These two chapters ignore product selection issues by firms, while the next two chapters consider them. Chapter 8 reviews the literature on product selection and spatial pricing, using the Hotelling model as the basic setting, and Chapter 9 shows that grafting the probabilistic choice framework onto the spatial framework resolves several of the problems in the original setting and enriches its predictions. The final part, Chapter 10, previews various extensions of the models and topics of further research.

The book can be divided into three parts. The first part, consisting of Chapters 2 through 5, goes into the details of the consumer-theoretic foundations underlying choice probability systems. Chapter 2 traces the development of discrete choice theory. The next three chapters argue that the discrete choice framework can consolidate the two main approaches to modelling demand for differentiated products: the representative consumer approach and the address or characteristics approach.

The second part, consisting of Chapters 6 through 9, applies the probabilistic choice approach to oligopoly models of product differentiation. Chapter 6 establishes equilibrium existence in discrete choice models and Chapter 7 elaborates the question of equilibrium versus optimal product diversity in the special framework of the multinominal logit model. These two chapters ignore product selection issues by firms, while the next two chapters consider them. Chapter 8 reviews the literature on product selection and spatial pricing, using the Hotelling model as the basic setting, and Chapter 9 shows that grafting the probabilistic choice framework onto the spatial framework resolves several of the problems in the original setting and enriches its predictions. The final part, Chapter 10, previews various extensions of the models and topics of further research.

Reviewer: H.Osana (Charlotteville) (MR 94b.90012)

##### MSC:

91-01 | Introductory exposition (textbooks, tutorial papers, etc.) pertaining to game theory, economics, and finance |

91B54 | Special types of economic markets (including Cournot, Bertrand) |

91B72 | Spatial models in economics |

62P20 | Applications of statistics to economics |