Price Competition and Minimal Differentiation

Résumé

The paper's main contribution is to argue that for a certain class of cost functions, Minimal Differentiation can occur when firms vertically differentiate on one dimension. In a sequential game where two firms compete in prices, I show that either maximal or minimal differentiation occur depending on the highest quality feasible in the economy. The welfare analysis show that the optimum can be a market outcome. Then, I characterize the effect of MQS on the non-optimal equilibria, showing that MQS can be used to implement the optimum. At last, I provide two applications : the adoption of an innovation, and warranties.