Taste heterogeneity and the scale of production: Fragmentation, unification, and segmentation

We propose a simple framework within which taste heterogeneity is a determinant of the scale of production. We show: (i) when taste heterogeneity is small, every firm chooses a mass production technology; (ii) when taste heterogeneity is large, every firm chooses a small-scale production technology; and (iii) when the degree of taste heterogeneity is intermediate, these symmetric equilibria cease to exist and both technologies coexist in equilibrium. We then extend the basic framework to a geographic framework and obtain a historical evolution of marketing that is characterized by three phases: a geographically fragmented market with small-scale production; a geographically unified market with mass production; and a geographically unified but characteristically segmented market.