Economic-Mathematical Modeling for Differentiated Products Markets

Abstract

The aim of this report is to investigate how the demand reaction on sales volume (the concentration effect) influences the differentiated products pricing. The mechanisms of consumers’ reaction are modeled by means of Markov chains processes and fractional Brownian motions. Both of these stochastic processes classes may be characterized by the existence of memory effects which allow reflecting the way market demand responds to sales value. This, in turn, helps to trace the link between the concentration effects and the pricing mechanism.

Keywords:

bandwagon effect, snob effect, stochastic processes, Markov chain, fractional Brownian motion