On monopoly power in a differentiated product industry

Abstract

This paper develops an increasing monopoly model based on the notion that consumers buying a particular brand have varying preferences for the brand. The model predicts a monopoly-increasing effect in certain types of goods that might be termed “reputation goods”. Examples of “reputation goods” are primary medical care, prescription drugs, and personal legal services. Entry may be accompanied by a rise in price in these types of goods because following entry preferred brands mostly have loyal customers with relatively inelastic demands.