ABSTRACT
This chapter focuses on product differentiation, which has been a recurring topic throughout this text. Product differentiation is associated with possible advantages for incumbent firms. These advantages include increased economies of scale, possible cost advantages for incumbents, and an increase in the capital barrier to entry. The chapter also focuses on Forms of Product Differentiation. The objective of product differentiation is to increase profits by increasing demand and decreasing the price elasticity of demand. Sellers attempt to differentiate their products in many ways. The chapter examines each of these approaches. First, it explores Hotelling's spatial model and then it examines how incorporating product differentiation into the Bertrand model completely changes the model's implications. The third section the chapter explores the hybrid model of monopolistic competition. In the fourth section, it investigates how asymmetric information affects markets with product differentiation. Finally, the chapter deals with the implications of the first-mover model as the basis of perceived product differentiation by consumers.
