The Logit as a Model of Product Differentiation.

The logit discrete choice model is argued to be flexible, tractable, and intuitively sound as a demand model of product differentiation under oligopoly. The free entry equilibrium product range is greater than or less than the social optimum, depending on cost and demand conditions and the degree of heterogeneity of consumer tastes. If the market provides "too many" products, then the difference between equilibrium and first-best optimal product diversity is negligible. However, when the market solution yields "too few" products, the market may seriously underprovide diversity. Copyright 1992 by Royal Economic Society.