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The Principle of Moderate Differentiation

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  • Sallstrom Matthews, S.E.

Abstract

What would happen if firms could collusively choose cost of transport (inconvenience) in Hotelling's spatial model? This paper endogenises inconvenience in a three stage game, where firms choose locations, the inconvenience, and finally compete in price, on the assumption of a common reservation price. The equilibrium of the game reveals a novel mechanism which induces firms to differentiate their products in moderation by locating halfway to the center and choosing inconvenience such that the market remains covered in equilibrium. Furthermore, using Launhardt's model with differential freight rate, it is shown that the collusive inconvenience is a Nash equilibrium.

Suggested Citation

  • Sallstrom Matthews, S.E., 2007. "The Principle of Moderate Differentiation," Cambridge Working Papers in Economics 0720, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0720
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    More about this item

    Keywords

    spatial differentiation; location; market structure; cost of transport; inconvenience; freight rate; business strategies.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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