Endogenous Product Design: A Linear Demand Approach

TL;DR

This paper develops a new linear demand model incorporating product characteristics to analyze endogenous product design, competition, and demand prediction across diverse market structures.

Contribution

It introduces a broad, flexible framework for linear demand that accounts for characteristics affecting valuations and competition, applicable to various market settings.

Findings

Framework provides new insights into optimal product design.

Model predicts demand for both existing and new products.

Applicable to markets with multiple goods, firms, and characteristics.

Abstract

This paper introduces a novel characteristics-based specification for linear demand to investigate endogenous product design. Characteristics are allowed to affect both consumers' product valuations and to what extent these compete. I demonstrate how such a specification can help linear demand deliver fresh insights in how firms may optimally design existing goods, as well as predict demand for new products. The framework is novel in its broad applicability to settings with any finite number of goods, firms, and product characteristics, with both vertical and horizontal differentiation across different market structures, and under asymmetry.