2009 Reports

Preferences and Equilibrium in Monopoly and Duopoly

Chen, Yongmin; Riordan, Michael H.

This paper takes the new approach of using a copula to characterize consumer preferences in a discrete choice model of product differentiation, and applies it to the economics of monopoly and duopoly. The comparative statics of demand strength and preference diversity, both properties of the marginal distribution of values for each product variety, are strikingly similar across market structures. Preference dependence, a property of the copula and an indicator of product differentiation, is a key determinant of whether prices are higher in multiproduct industries compared to single-product monopoly. Furthermore, the effects of preference on prices and profits influence equilibrium product selection. Remarkably, a horizontally-differentiated duopoly sometimes can foreclose a higher-quality monopoly to the detriment of consumer and social welfare.