Competing Head‐to‐head or Selling to a Fringe

Consider a price‐setting duopoly with differentiated goods and heterogeneous consumers. When consumer tastes are identical, all firms choose the same variant in equilibrium and prices are equal to marginal costs. For a more concentrated consumer density, firms provide (weakly) closer substitutes and prices are closer to marginal costs of production in certain symmetric markets. That is, firms tend to compete head‐to‐head and price equal to marginal costs is a good approximation when most consumers are more or less the same. In contrast, one firm sells to fringe consumers and maintains its product differentiated from its competitor in certain asymmetric markets. The competitor’s price does not converge to marginal costs.