A GENERALIZED-MODEL OF HORIZONTAL PRODUCT DIFFERENTIATION

A famous result in the literature on horizontal product differentiation is due to d'Aspremont, Gabszewicz and Thisse [1979]. They show that in a slightly modified Hotelling model profit maximizing firms choose maximum instead or minimum differentiation. The aim of this paper is to show that the result of maximum differentiation is not robust. We provide an example for a wide class of markets where firms will choose interior solutions if consumers have an outside option for their use of money.