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Competition in multi-characteristics spaces: Hotelling was almost right

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  • IRMEN, A.
  • THISSE, J.-F.

Abstract

Lancasterian models of product differentiation typically assume a one-dimensional characteristics space. We show that standard results on prices and locations no longer hold when firms compete in a multi-characteristics space. In the location game with n characteristics, firms choose to maximize differentiation in the dominant characteristic and to minimize differentiation in the others when the salience coefficient of the former is sufficiently large. Thus, the principle of minimum differentiation holds for all but one characteristic. Furthermore, prices do not necessarily fall when products get closer in the characteristics space because price competition is relaxed when products are differentiated enough in the dominant characteristic.
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Suggested Citation

  • Irmen, A. & Thisse, J.-F., 1998. "Competition in multi-characteristics spaces: Hotelling was almost right," LIDAM Reprints CORE 1305, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:1305
    DOI: 10.1006/jeth.1997.2348
    Note: In : Journal of Economic Theory, 78 (1), 76-102, 1998.
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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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