The Max-Min-Min Principle of Product Differentiation
AbstractWe 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.
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Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 9702001.
Length: 36 pages
Date of creation: 05 Feb 1997
Date of revision:
Note: Type of Document - PDF/PostScript; prepared on IBM; to print on HP; pages: 36; figures: included at the end. forthcoming, Journal of Regional Science (1997)
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Other versions of this item:
- Ansari, A. & Economides, N. & Steckel, J., 1996. "The Max-Min-Min Principle of product Differentiation," Working Papers 96-10, New York University, Leonard N. Stern School of Business, Department of Economics.
- L - Industrial Organization
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