A Model of Product Differentiation and Profitability

Abstract

The purpose of this paper is to develop a model of product differentiation in which there is an asymmetry. Some customers are easier to serve than others. It turns out that profits may be either positively or negatively related to this ease or difficulty of service, and that profits and market share may be negatively related in some cases. The results of this model are used to shed light on some aspects of the collusion versus differential efficiency debate.