Specialization, Generic Firms and Market Competition

Abstract

The choice of specialization affects firms' brand perception by consumers and it is of crucial importance for their profitability in competitive markets. We model how firms choose specialization through a spatial non-localized competition framework that naturally allows for markets where not all brands are available. The model predicts the co-existence of generic and specialized firms, a feature common to many markets but very rare in modeling endogenous product differentiation. Our analysis also provides general results on firms' pricing and evaluates the sensitivity of the co-existence of generic and specialized firms to a number of assumptions.