Product Differentiation under Uncertainty
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).
|Date of creation:||Feb 2001|
|Date of revision:|
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European Economic Review,
Elsevier, vol. 38(1), pages 45-58, January.
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