What is Product Differentiation, Really?

Abstract

Empirical research on industrial organization has failed to identify the empirical bases of product differentiation (that is, each seller facing an individual downward-sloping demand curve). Two sets of conditions are theoretically sufficient: one resting on complex attribute structures coupled with fixed costs, the other on costs of information to guide buyers' choices among brands. Factor analysis of observable decision variables and market patterns appears to reveal and confirm these underlying causes. The estimated factors perform successfully to test hypotheses about the effects of product differentiation on the mutual sensitivity of prices of Australian domestic manufactures and competing imports. PRODUCT DIFFERENTIATION is a well-defined theoretical concept resting on