Costly horizontal differentiation
AbstractWe study the effect of quadratic differentiation costs in the Hotelling model of endogenous product differentiation. The equilibrium location choices are found to depend on the magnitude of the differentiation costs (relatively to the transportation costs supported by consumers). When the differentiation costs are low, there is maximum differentiation. When they are intermediate, there is partial differentiation, with a degree of differentiation that decreases with the differentiation costs. When they are above a certain threshold, there is no equilibrium. In any case, the socially optimal degree of differentiation is always lower than the equilibrium level. We also study the case of collusion between firms. If firms can combine locations but not prices, they locate asymmetrically when differentiation costs are high and choose maximum differentiation when they are low. When collusion extends to price setting, there is partial differentiation.
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Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 351.
Length: 25 pages
Date of creation: Dec 2009
Date of revision:
Costly product differentiation; Spatial competition; Hotelling model;
Other versions of this item:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- 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-2010-01-10 (All new papers)
- NEP-COM-2010-01-10 (Industrial Competition)
- NEP-IND-2010-01-10 (Industrial Organization)
- NEP-URE-2010-01-10 (Urban & Real Estate Economics)
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