Product differentiation and endogenous disutility

This paper models the choice of degree of focus (or general purposeness) available to firms by endogenizing transportation costs in an address model of horizontal differentiation. The formulation is in three stages: entry, focus or design competition and price competition. The strategic effect of product design is analyzed. The equilibrium level of general purposeness is shown to depend critically on 'neighbor exclusivity'. The latter and, more generally, market structure and product diversity are shown to depend on the cost of producing general purpose products. If general purposeness is 'free'-to design and produce-only two firms enter the market and set large transportation costs, underproviding product diversity. (C) 1997 Elsevier Science B.V.