Product differentiation and competitive pressure

This paper compares the commonly used linear demand model introduced by Bowley (The mathematical groundwork of economics, Oxford University Press, Oxford, 1924) with the specification of Shapley and Shubik (Kyklos 22:30-44, 1969). The latter has the advantage that aggregate demand does not depend on a parameter that measures the degree of product differentiation. This allows to interpret variations in the degree of product differentiation as changes in competitive pressure because these changes can influence aggregate demand only through changes in equilibrium prices and quantities. The consequences of the alternative specifications are made explicit with two applications. In both cases the different specifications yield substantial changes in important results in industrial economics.