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Competition in Multi-characteristics Spaces: Hotelling was Almost Right

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  • Irmen, Andreas
  • Thisse, Jacques-François

Abstract

Lancasterian models of product differentiation typically assume a one-dimensional characteristics space. We show that standard results on prices and locations no longer hold when firms compete in a multi-characteristics space. In the location game with n characteristics, firms choose to maximize differentiation in the dominant characteristic and to minimize differentiation in the others when the salience coefficient of the former is sufficiently large. Thus, the principle of minimum differentiation holds for all but one characteristic. Furthermore, prices do not necessarily fall when products get closer in the characteristics space because price competition is relaxed when products are differentiated enough in the dominant characteristic.

Suggested Citation

  • Irmen, Andreas & Thisse, Jacques-François, 1996. "Competition in Multi-characteristics Spaces: Hotelling was Almost Right," CEPR Discussion Papers 1446, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1446
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    More about this item

    Keywords

    Agglomeration; Multi-characteristics Space; Product Positioning;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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