"The discrete choice approach provides an ideal framework for describing the demands for differentiated products and can be used for studying most product differentiation models in the literature. By introducing extra dimensions of product heterogeneity, the framework also provides richer models of firm location and product selection."--BOOK JACKET.

Consider an individual who is confronted with a set of mutually exclusive alternatives and who must make a choice among them. The neoclassical economist's approach to this problem is to assume the consumer's choice process is deterministic. Reality, however, tells a different story. For example, when an individual must make repeated choices between two alternatives under similar circumstances, sometimes one and sometimes the other will be chosen. Such behavior reflects fluctuations inherent in the process of evaluating alternatives, which suggests that the deterministic choice model is not always satisfactory as an explanatory tool. Discrete choice approach provides an ideal way for describing the demands for differentiated products, since it deals explicitly with a population of heterogeneous consumers making mutually exclusive choices from a set of substitutable goods. Under the framework of discrete choice models of love of variety, this dissertation, firstly through developing a general equilibrium monopolistic competition model, studies market structure under autarky as well as under free trade. The results show that ceteris paribus, the larger is the love of variety index, the more is the equilibrium number of firms in the differentiated good industry. Moreover, under free trade, the equilibrium number of firms in the more (less) efficient country will expand (shrink). As a consequence, the efficiency composition of the industry in the more (less) efficient country will worsen (improve). It is also interesting to reveal that the equilibrium price for each variant is uniformly marked up by the same amount, which is equal to the index of the degree of love of variety. This dissertation then further researches into some economic policy issues. In the study of the excessive competition, it is shown that there is always excess entry when there are only domestic, firms in the industry. However, whenever there are FDIs in the economy, the theorem is not applicable. Finally, the dissertation examines the optimal subsidy policy. The results show that the policy has nothing to do with the improvement of social welfare if the subsidy is symmetric. But if only the foreign firms "enjoy" the policy, the optimal policy would be taxing them. A real subsidy may happen only when the foreign firms are very inefficient compared to the domestic firm. In this situation, the host country gains a lot from employment improvement.

Standard discrete choice models such as logit, nested logit, and random coefficients models place very strong restrictions on how unobservable product space increases with the number of products. We argue (and show with Monte Carlo experiments) that these restrictions can lead to biased conclusions regarding price elasticities and welfare consequences from additional products. In addition, these restrictions can identify parameters which are not intuitively identified given the data at hand. We suggest two alternative models that relax these restrictions, both motivated by structural interpretations. Monte-Carlo experiments and an application to data show that these alternative models perform well in practice

There are few industries in modern market economies that do not manufacture differentiated products. This book provides a systematic explanation and analysis of the widespread prevalence of this important category of products. The authors concentrate on models in which product selection is endogenous. In the first four chapters they consider models that try to predict the level of product differentiation that would emerge in situations of market equilibrium. These market equilibria with differentiated products are characterised and then compared with social welfare optima. Particular attention is paid to the distinction between horizontal and vertical differentiation as well as to the related issues of product quality and durability. This book brings together the most important theoretical contributions to these topics in a succinct and coherent manner. One of its major strengths is the way in which it carefully sets out the basic intuition behind the formal results. It will be useful to advanced undergraduate and graduate students taking courses in industrial economics and microeconomic theory.