Shaked Sutton (1982) - Relaxing Price Competition Through Product Differentiation
- Shaked, A. and J. Sutton (1982), "Relaxing price competition through product differentiation", Review of Economic Studies 49, 3-13. pdf
The notion of a Perfect Equilibrium in a multi-stage game is used to characterize industry equilibrium under Monopolistic Competition, where products are differentiated by quality. Central to the problem of providing adequate foundations for the analysis of monopolistic competition, is the problem of describing market equilibria in which firms choose both the specification of their respective products, and their prices. The present paper is concerned with a-very particular-model of such a market equilibrium. In this equili- brium, exactly two potential entrants will choose to enter the industry; they will choose to produce differentiated products; and both will make positive profits.