Strategic and Non-strategic Differentiation

Esther Gal-Or ()

Canadian Journal of Economics, 1987, vol. 20, issue 2, pages 340-56

Abstract: When firms choose the characteristic of their products before output is produced, imperfectly competitive firms may use this characteristic strategically so as to reduce the output level produced by the rival. Using a simple two-stage duopoly model, the author demonstrates that such "strategic" use of the product attribute reduces the degree of differentiation between brands. As an outcome, each firm loses some market power and competition is more intense. The author demonstrates through an example that such reduced differentiation leads to reduced joint profits and reduced welfare.

Date: 1987

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