Product differentiation decisions under ambiguous consumer demand and pessimistic expectations

Michal Krol

International Journal of Industrial Organization, 2012, vol. 30, issue 6, 593-604

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.

Keywords: Hotelling; Uncertainty; Non-unique prior; Pessimism (search for similar items in EconPapers)
JEL-codes: C72 D43 D81 L13 R32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Working Paper: Product differentiation decisions under ambiguous consumer demand and pessimistic expectations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:30:y:2012:i:6:p:593-604

DOI: 10.1016/j.ijindorg.2012.05.004

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