IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Product differentiation decisions under ambiguous consumer demand and pessimistic expectations

  • Michal Król

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.

(This abstract was borrowed from another version of this item.)

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.

File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-1103.pdf
Download Restriction: no

Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1103.

as
in new window

Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:man:sespap:1103
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/

More information through EDIRC

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.:

as in new window
  1. Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
  2. 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.
  3. Martin J Osborne & Carolyn Pitchik, 1985. "Equilibrium in Hotelling's Model of Spatial Competition," Department of Economics Working Papers 1985-02, McMaster University.
  4. Heifetz, Aviad & Shannon, Chris & Spiegel, Yossi, 2007. "What to maximize if you must," Journal of Economic Theory, Elsevier, vol. 133(1), pages 31-57, March.
  5. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  6. 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.
  7. Florian Englmaier, 2010. "Managerial optimism and investment choice," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(4), pages 303-310.
  8. 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.
  9. Dirk Bergemann & Karl H Schlag, 2007. "Pricing without Priors," Levine's Bibliography 122247000000001557, UCLA Department of Economics.
  10. Anderson, Simon P. & Goeree, Jacob K. & Ramer, Roald, 1997. "Location, Location, Location," Journal of Economic Theory, Elsevier, vol. 77(1), pages 102-127, November.
  11. Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2005. "The Dynamic Evolution of Preferences," Discussion Papers 1415, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. 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.
  13. 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.
  14. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527RR, Cowles Foundation for Research in Economics, Yale University, revised Sep 2008.
  15. 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.
  16. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
  22. Kieron Meagher & Klaus Zauner, 2005. "Location-then-price competition with uncertain consumer tastes," Economic Theory, Springer, vol. 25(4), pages 799-818, 06.
  23. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:man:sespap:1103. 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: (Marianne Sensier)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.