2009): “Microfoundations for the Linear Demand Product Differentiation Model, with Applications”, working paper

This paper shows (1) that the Spence-Dixit-Vives model of linear demand for di¤erentiated varieties is implied if supplies of substitutes reduce individual consumersreservation prices as indicated in the pa-per, (2) that for the micro-foundation-based version SDV demand and endogenous sunk costs, the equilibrium number of varieties is indepen-dent of the number of consumers in the market and the marginal cost of a variety of unit quality, and (3) that with endogenous sunk cost, if demand does not expand with the number of varieties (as in the SDV model), the equilibrium number of varieties is unchanged, but equilibrium qualities and quantities purchased are less, all else equal. I am grateful for comments received at the Katholieke Universiteit Leuven and the European University Institute. Responsibility for er-rors is my own