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Consumer informedness: A key driver of differentiation

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  • Amit Pazgal
  • David Soberman
  • Raphael Thomadsen

Abstract

Minimum Differentiation is the equilibrium in spatial models with fixed prices, while firms move apart to reduce the intensity of competition when firms set prices. Nevertheless, firms collocate in many industries where marketing‐active firms compete on price. This puzzle is called the Hotelling paradox. We offer a resolution of this puzzle by noting that imperfect information about the availability of all products can soften competition, allowing firms to produce similar products without engaging in intense price competition. Specifically, we construct a model that predicts minimum differentiation when consumers have low awareness about products and maximum differentiation when they are well informed.

Suggested Citation

  • Amit Pazgal & David Soberman & Raphael Thomadsen, 2022. "Consumer informedness: A key driver of differentiation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 356-368, April.
    • Handle: RePEc:bla:jemstr:v:31:y:2022:i:2:p:356-368
    DOI: 10.1111/jems.12463
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    References listed on IDEAS

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    Cited by:

    1. Sridhar Moorthy & Shervin Shahrokhi Tehrani, 2023. "Targeting Advertising Spending and Price on the Hotelling Line," Marketing Science, INFORMS, vol. 42(6), pages 1057-1079, November.

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