Monopolistic dynamics with endogenous product differentiation

Abstract

This research considers the problem of a price-discriminating monopolist aiming at choosing output and investing in product differentiation to foster consumers perceiving products as being heterogeneous in different market segments. It then introduces bounded rationality and concentrates on the dynamic analysis showing the existence of several dynamic phenomena caused by the interaction between endogenous product differentiation and gradient dynamics. Though product differentiation can generally increase market power and profits, in this context it can generate a lack of coordination between the managers working in each segment.