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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.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-1103.pdf
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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1103.

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Date of creation: 2011
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Handle: RePEc:man:sespap:1103
Contact details of provider: Postal: Manchester M13 9PL
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/

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  18. 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.
  19. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
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