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Uncertainty in Spatial Duopoly with Possibly Asymmetric Distributions: a State Space Approach

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  • Kieron J. Meagher
  • Klaus G. Zauner

Abstract

In spatial competition firms are likely to be uncertain about consumer locations when launching products either because of shifting demograph- ics or of asymmetric information about preferences. Realistically distri- butions of consumer locations should be allowed to vary over states and need not be uniform. However, the existing literature models location uncertainty as an additive shock to a uniform consumer distribution. The additive shock restricts uncertainty to the mean of the consumers loca- tions. We generalize this approach to a state space model in which a vector of parameters gives rise to different distributions of consumer tastes in dif- ferent states, allowing other moments (besides the mean) of the consumer distribution to be uncertain. We illustrate our model with an asymmetric consumer distribution and obtain a unique subgame perfect equilibrium with an explicit, closed-form solution. An equilibrium existence result is then given for the general case. For symmetric distributions, the unique subgame perfect equilibrium in the general case can be described by a simple closed-form solution.

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File URL: http://cbe.anu.edu.au/research/papers/ceprdpapers/DP579.pdf
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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 579.

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Date of creation: Apr 2008
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Handle: RePEc:auu:dpaper:579

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Keywords: Location; Product Differentiation; Uncertainty; Hotelling;

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