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Product Differentiation, Competitive Toughness, and Intertemporal Substitution
Author(s) -
Ivanova Vera,
Ushchev Philip
Publication year - 2019
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12304
Subject(s) - monopolistic competition , product differentiation , elasticity of substitution , economics , microeconomics , substitution (logic) , elasticity (physics) , product (mathematics) , production (economics) , computer science , materials science , geometry , mathematics , cournot competition , programming language , composite material , monopoly
Standard measures of competitive toughness fail to capture the fact that, as consumers optimize intertemporally, firms operating today compete with (as yet non‐existent) businesses, which will be started tomorrow. We develop a two‐tier constant elasticity of substitution (CES) model of dynamic monopolistic competition in which the impact of product differentiation on the market outcome depends crucially on the elasticity of intertemporal substitution (EIS). The degree of product differentiation per se fails to serve as a meaningful indicator of competitive toughness: what matters is its cross‐effect with EIS. We also extend the model to the case of non‐CES preferences in order to capture variable mark‐ups.