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Competition in multi-characteristics spaces: hotelling was almost right

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  • IRMEN, Andreas

    ()
    (Université de Lausanne, HEC-DEEP, Lausanne-Dorigny)

  • THISSE, Jacques-Francois

    ()
    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

Lancasterian models of product differentiation typically assume a one- dimensional characteristics space. We show that standard results on prices and locations no longer hold when firms compete in a multi- characteristics space. In the location game with n characteristics, firms choose to maximize differentiation in the dominant characteristic and to minimize differentiation in the others when the salience coefficient of the former is sufficiently large. Thus, the principle of minimum dif- ferentiation holds for all but one characteristic. Furthermore, prices do not necessarily fall when products get closer in the characteristics space because price competition is relaxed when products are differentiated enough in the dominant characteristic.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1997053.

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Date of creation: 01 Aug 1997
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Handle: RePEc:cor:louvco:1997053

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Keywords: product positioning; multi-characteristics space;

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  1. B. Curtis Eaton & Myrna Holtz Wooders, 1985. "Sophisticated Entry in a Model of Spatial Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 282-297, Summer.
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  7. Egbert Dierker, 1989. "Competition for Customers," Discussion Paper Serie A 244, University of Bonn, Germany.
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  10. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 431-42, June.
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  12. Mark B. Vandenbosch & Charles B. Weinberg, 1995. "Product and Price Competition in a Two-Dimensional Vertical Differentiation Model," Marketing Science, INFORMS, vol. 14(2), pages 224-249.
  13. Asim Ansari & Nicholas Economides & Joel Steckel, 1997. "The Max-Min-Min Principle of Product Differentiation," Industrial Organization 9702001, EconWPA.
  14. Neven, D. & Thisse, J-F., 1989. "On Quality And Variety Competition," CORE Discussion Papers 1989020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  16. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227.
  17. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
  18. Swann, Peter, 1990. "Product competition and the dimensions of product space," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 281-295, June.
  19. Tabuchi, Takatoshi, 1994. "Two-stage two-dimensional spatial competition between two firms," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 207-227, April.
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