Product differentiation decisions under ambiguous consumer demand and pessimistic expectations

Michał Król

Research output: Contribution to journalArticlepeer-review

85 Downloads (Pure)

Abstract

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. © 2012 Elsevier B.V.
Original languageEnglish
Pages (from-to)593-604
Number of pages11
JournalInternational Journal of Industrial Organization
Volume30
Issue number6
DOIs
Publication statusPublished - Nov 2012

Keywords

  • Hotelling
  • Non-unique prior
  • Pessimism
  • Uncertainty

Fingerprint

Dive into the research topics of 'Product differentiation decisions under ambiguous consumer demand and pessimistic expectations'. Together they form a unique fingerprint.

Cite this