We propose an intuitive representation of product design in which firms locate inside a circle and consumers in its outer circumference. Designs trade off horizontal and vertical transport costs. Our setting encompasses all linear demand rotations. Firms with lower quality or higher marginal costs choose niche designs that cater to specific consumers at the expense of alienating the rest. Firms choose intermediate designs or more polarized ones, instead, depending on the convexity of the vertical transport cost. We examine such design choices in monopoly, duopoly, and monopolistic competition settings.
Bar-Isaac, Heski, Guillermo Caruana, and Vicente Cuñat.
"Targeted Product Design."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
Market Structure, Pricing, and Design: Monopoly
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection