Product differentiation decisions under ambiguous consumer demand and pessimistic expectations
This paper studies product differentiation decisions in a spatial duopoly with limited information on consumer demand. In particular, a situation is discussed in which the firms do not know the exact distribution of the random location of consumer demand and its responsiveness to price changes (measured by the scale of transport costs), but resolve the resulting ambiguity using the α-maxmin or minimax regret criteria. When the firms are sufficiently pessimistic (α is high enough), results are in contrast with the existing literature. In particular, an increase of demand location uncertainty decreases the equilibrium product differentiation, intensifying the second-stage competition in prices, although the effect is dampened by uncertainty about transport costs. Endogenizing the choice of objective function leads to the dominance of an extreme form of pessimism, which turns out to be socially-optimal.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Florian Englmaier, 2010.
"Managerial optimism and investment choice,"
Managerial and Decision Economics,
John Wiley & Sons, Ltd., vol. 31(4), pages 303-310.
- Meagher Kieron J & Teo Ernie G.S. & Wang Wen, 2008. "A Duopoly Location Toolkit: Consumer Densities Which Yield Unique Spatial Duopoly Equilibria," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-23, April.
- Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2005.
"The Dynamic Evolution of Preferences,"
1415, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Luca Rigotti & Chris Shannon=20, 2002.
"Uncertainty and Risk in Financial Markets,"
Game Theory and Information
- Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt6m42r5rr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt7pp7113z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Martin J Osborne & Carolyn Pitchik, 1985.
"Equilibrium in Hotelling's Model of Spatial Competition,"
Department of Economics Working Papers
1985-02, McMaster University.
- Osborne, Martin J & Pitchik, Carolyn, 1987. "Equilibrium in Hotelling's Model of Spatial Competition," Econometrica, Econometric Society, vol. 55(4), pages 911-22, July.
- HEIFETZ, Aviad & SHANNON, Chris & SPIEGEL, Yossi, 2003.
"What to maximize if you must,"
CORE Discussion Papers
2003047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2003. "What to Maximize If You Must," Game Theory and Information 0303002, EconWPA.
- Chris Shannon, 2003. "What to Maximize if You Must," Theory workshop papers 658612000000000044, UCLA Department of Economics.
- Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2004. "What to Maximize if You Must," Discussion Papers 1414, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Aghion, P. & Espinoza, M.P. & Jullien, B., 1990.
"Dynamic Duopoly With Learning Through Market Experimentation,"
DELTA Working Papers
90-13, DELTA (Ecole normale supérieure).
- Aghion, Philippe & Espinosa, Maria Paz & Jullien, Bruno, 1993. "Dynamic Duopoly with Learning through Market Experimentation," Economic Theory, Springer, vol. 3(3), pages 517-39, July.
- Jullien Bruno & Aghion Philippe & Paz Espinoza M, 1990. "Dynamic duopoly with learning through market experimentation," CEPREMAP Working Papers (Couverture Orange) 9012, CEPREMAP.
- Bergemann, Dirk & Schlag, Karl, 2011.
"Robust monopoly pricing,"
Journal of Economic Theory,
Elsevier, vol. 146(6), pages 2527-2543.
- Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2007.
- Dirk Bergemann & Karl Schlag, 2007. "Robust Monopoly Pricing," Levine's Bibliography 321307000000000983, UCLA Department of Economics.
- Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527R2, Cowles Foundation for Research in Economics, Yale University, revised Sep 2008.
- Dirk Bergemann & Karl H Schlag, 2007.
"Pricing without Priors,"
122247000000001557, UCLA Department of Economics.
- Smith, Michael A. & Paton, David & Williams, Leighton Vaughan, 2009.
"Do bookmakers possess superior skills to bettors in predicting outcomes?,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 71(2), pages 539-549, August.
- Michael A. Smith & David Paton & Leighton Vaughan Williams, 2009. "Do Bookmakers Possess Superior Skills to Bettors in Predicting Outcomes?," Post-Print hal-00684229, HAL.
- Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
- Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
- Anderson, Simon P. & Goeree, Jacob K. & Ramer, Roald, 1997. "Location, Location, Location," Journal of Economic Theory, Elsevier, vol. 77(1), pages 102-127, November.
- Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
- Krol Michal, 2011.
"On the Existence and Social Optimality of Equilibria in a Hotelling Game with Uncertain Demand and Linear-Quadratic Costs,"
The B.E. Journal of Theoretical Economics,
De Gruyter, vol. 11(1), pages 1-22, March.
- Michal Król, 2011. "On the existence and social optimality of equilibria in a Hotelling game with uncertain demand and linearquadratic costs," The School of Economics Discussion Paper Series 1101, Economics, The University of Manchester.
- Harter, John F. R., 1997. "Hotelling's competition with demand location uncertainty," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 327-334, May.
- Bester, Helmut & de Palma, Andre & Leininger, Wolfgang & Thomas, Jonathan & von Thadden, Ernst-Ludwig, 1996. "A Noncooperative Analysis of Hotelling's Location Game," Games and Economic Behavior, Elsevier, vol. 12(2), pages 165-186, February.
- Meagher, Kieron J. & Zauner, Klaus G., 2004. "Product differentiation and location decisions under demand uncertainty," Journal of Economic Theory, Elsevier, vol. 117(2), pages 201-216, August.
- Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-90, December.
- Kieron Meagher & Klaus Zauner, 2005. "Location-then-price competition with uncertain consumer tastes," Economic Theory, Springer, vol. 25(4), pages 799-818, 06.
- Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
- Balvers, Ronald & Szerb, Lazlo, 1996. "Location in the Hotelling duopoly model with demand uncertainty," European Economic Review, Elsevier, vol. 40(7), pages 1453-1461, August.
- F. Javier Casado-Izaga, 2000. "Location decisions: The role of uncertainty about consumer tastes," Journal of Economics, Springer, vol. 71(1), pages 31-46, February.
When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:593-604. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.