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Probalilistic duopoly with differentiation by attributes

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Reynald-Alexandre Laurent

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Abstract

This paper proposes a discrete choice duopoly in which products are described and differentiated by their specific attributes. These attributes can be discrete characteristics or differences in continuous variables, such as prices or qualities. Consumers follow a probabilistic reasoning which is consistent with random decision rule models such as Tversky's "Elimination by Aspects" framework (1972a,b). This type of behavior is relevant for small everyday life purchases. The demand system provides a general structure of product differentiation in which special cases are given by classical models of horizontal and vertical differentiation. Existence and uniqueness of a price Nash equilibrium in pure strategies are established in the duopoly. When attributes' utilities vary, comparative statics properties of profits can be explained by "attractiveness" and "differentiation" effects. These effects are combined in a new way compared to the deterministic structures or to the logit duopoly. For example, an increase in the low utility index of attributes strengthens product differentiation.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2007-27.

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Date of creation: 2007
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Handle: RePEc:pse:psecon:2007-27

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  4. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January. [Downloadable!] (restricted)
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  5. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May. [Downloadable!] (restricted)
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