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Ambiguous consumer tastes and product differentiation

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  • Olivier Kayser

Abstract

Considering that firms have multiple consumer taste distributions, we introduce in the vertical differentiation framework an ambiguous demand in a duopoly. We investigate the effects of ambiguity aversion on product differentiation and pricing choices. By specifying these distributions by Heaviside functions we obtain results on the existence and form of several Subgame-Perfect Nash Candidate Equilibria. The associated equilibrium prices are decreasing with ambiguity aversion. Under the market coverage assumption, we show that the level of differentiation is always maximal whatever the degree of ambiguity aversion. Finally, we study which of the Subgame-Perfect Nash Candidate Equilibria is the solution of the game depending on the width of the taste distributions and the degree of ambiguity aversion.

Suggested Citation

  • Olivier Kayser, 2023. "Ambiguous consumer tastes and product differentiation," EconomiX Working Papers 2023-20, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2023-20
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    File URL: https://economix.fr/pdf/dt/2023/WP_EcoX_2023-20.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical differentiation; Ambiguous consumer tastes; Ambiguous demand; Ambiguity aversion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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