The Relationship between Models of Horizontal and Vertical Differentiation.

This paper shows how to derive the income and substitution effects of a price change in a differentiated goods model. In the process of doing so, the author shows how to convert a model of a vertically differentiated market into one of horizontally differentiation by constructing two market-specific functions. One of these functions would represent the acknowledged ranking of types if the market were vertically differentiated; the other is a simple function representing the disutility associated with consuming a non-ideal type. Copyright 1992 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research