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The Max-Min Principle of Product Differentiation

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  • Nicholas Economides
  • Joel Steckel

Abstract

We analyze two- and three-dimensional variants of Hotelling's model of differentiated products. In our setup, consumers can place different importance on each product attribute; this is measured by a weight in the disutility of distance in each dimension. Two firms play a two-stage game; they choose locations in stage 1 and prices in stage 2. We seek subgame- perfect equilibria. We find that all such equilibria have maximal differentiation in one dimension only; in all other dimensions, they have minimum differentiation. An equilibrium with maximal differentiation in a certain dimension occurs when consumers place sufficient importance (weight) on that attribute. Thus, depending on the importance consumers place on each attribute, in two dimensions there is a "max-min" equilibrium, a "min - max" equilibrium, or both. In three dimensions, depending on the weights, there can be a "max-min-min" equilibrium, a "min-max- min" equilibrium, a "min-min- max" equilibrium, any two of them, or all three.

Suggested Citation

  • Nicholas Economides & Joel Steckel, "undated". "The Max-Min Principle of Product Differentiation," Networks, Compatibility 94-16, Economics of Networks.
    • Handle: RePEc:wop:ennenc:94-16
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    Cited by:

    1. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    2. Stefan Roth, 1999. "Möglichkeiten und Grenzen ökonomischer Positionierungsmodelle," Schmalenbach Journal of Business Research, Springer, vol. 51(3), pages 243-266, March.
    3. Andrea Mangani & Paolo Patelli, 2002. "The Max-Min Principle of Product Differentiation: An Experimental Analysis," LEM Papers Series 2002/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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