ABSTRACT
This chapter focuses on the bearings of product differentiation formulated from the specific viewpoint of discrete choice theory and express unit demands for their preferred variety of a good whose characteristics are endogenously chosen by firms for strategic reasons. Discrete choice theory obviously shares the flavour combining it with a renovated attention for the properties of the entry process, in whose connection the so-called finiteness property has been characterized. Discrete choice model encompasses the horizontal differentiation model dating back to Hotelling in its reformulation based on quadratic transportation costs. Managerialization increases qualities and prices while decreasing profits, as compared to the outcome generated by a fully entrepreneurial industry. The competitive pressure associated with managerialization increases consumer surplus. Combined with the fact that market demand is totally price-inelastic in Bertrand competition model, this lowers profits more than it increases consumer surplus, with the unforeseeable outcome of diminishing social welfare as compared to the fully entrepreneurial setup.
