On the existence and social optimality of equilibria in a Hotelling game with uncertain demand and linearquadratic costs
AbstractThis paper examines a variant of the Hotelling two-stage mill-pricing duopoly game with âlinear-quadraticâ transport costs and the uniform customer distribution subject to a random shock. The demand is equally likely to be found anywhere in a fixed interval of feasible product characteristics, with the ex-post differentiation of tastes parametrized to reflect the degree of uncertainty. It turns out that, for uncertainty big enough, the presence of a linear component in the cost function no longer rules out an analytical solution to the game, which is a common problem in spatial competition models. In particular, a subgame-perfect equilibrium is shown to exist in which the firmsâ locations approach the socially efficient ones as uncertainty further increases, regardless of the curvature of the cost function. When the demand uncertainty reaches maximum, mill-pricing is equivalent to spatial price discrimination under the most general conditions.
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Bibliographic InfoPaper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1101.
Date of creation: 2011
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Other versions of this item:
- Krol Michal, 2011. "On the Existence and Social Optimality of Equilibria in a Hotelling Game with Uncertain Demand and Linear-Quadratic Costs," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-22, March.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-23 (All new papers)
- NEP-COM-2011-01-23 (Industrial Competition)
- NEP-GTH-2011-01-23 (Game Theory)
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- Michal Król, 2011.
"Product differentiation decisions under ambiguous consumer demand and pessimistic expectations,"
The School of Economics Discussion Paper Series
1103, Economics, The University of Manchester.
- Król, Michał, 2012. "Product differentiation decisions under ambiguous consumer demand and pessimistic expectations," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 593-604.
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