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Product Differentiation under Uncertainty

Author

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  • Elie Appelbaum

    (Department of Economics, York University)

Abstract

In this paper we consider the effects of uncertainty on product differentiation by two oligopolistic firms within the context of the standard Hotelling model. We examine a subgame perfect equilibrium of a two-stage non-cooperative game. In the first stage, firms choose their location before market conditions (location) are known. In the second stage, once uncertainty is resolved, they compete in prices. We show that for levels of uncertainty which are not “too high”, a unique pure-strategy Nash equilibrium of the two stage game exists. We show that the degree of product differentiation will be higher under uncertainty, and will increase with uncertainty. Furthermore, for low level of uncertainty, product differentiation is “extreme”, whereas for higher levels of uncertainty, differentiation is less than extreme (but still higher than under certainty and increasing with uncertainty).

Suggested Citation

  • Elie Appelbaum, 2001. "Product Differentiation under Uncertainty," Working Papers 2001_4, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2001_4
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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2001/elie-2001-differentiation.pdf
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    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    2. Larry Epstein, 1978. "Production Flexibility and the Behaviour of the Competitive Firm under Price Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(2), pages 251-261.
    3. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring.
    4. Appelbaum, Elie & Weber, Shlomo, 1994. "Equilibrium entry patterns under uncertainty," European Economic Review, Elsevier, vol. 38(1), pages 45-58, January.
    5. Donnenfeld, Shabtai & Weber, Shlomo, 1992. "Vertical product differentiation with entry," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 449-472, September.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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