Product Differentiation, the Volume of Trade and Profits under Cournot and Bertrand Duopoly

This article analyses how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001). The drawback of Bowley demand functions is that an increase in product differentiation increases the siz...

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Bibliographic Details
Published in:International journal of the economics of business 2015-01, Vol.22 (1), p.73-86
Main Authors: Collie, David R., Le, Vo Phuong Mai
Format: Article
Language:English
Subjects:
Bertrand Oligopoly
Consumers
Cournot Oligopoly
Demand curves
Demand functions
Duopoly
L13
Product Differentiation
Profit
Studies
Trade liberalization
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Summary:This article analyses how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001). The drawback of Bowley demand functions is that an increase in product differentiation increases the size of the market so the increase in the volume of trade may be the result of the increase in the size of the market rather than the increase in product differentiation per se. The Shubik-Levitan demand functions have the advantage that an increase in product differentiation does not increase the size of the market, but consumers still have a 'love of variety'. It is shown that the volume of trade in terms of quantities falls with increasing product differentiation when the trade cost is relatively low, but rises with increasing product differentiation when the trade cost is relatively high. Among the results, it is shown that the trade liberalisation is more likely to be profitable under Cournot duopoly than under Bertrand duopoly for differentiated products with a positive trade cost.
ISSN:1357-1516
1466-1829
DOI:10.1080/13571516.2014.950476