The Principle of Moderate Differentiation

Susanna E Sallstrom Matthews

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: What would happen if firms could collusively choose cost of transport (inconvenience) in Hotelling's spatial model? This paper endogenises inconvenience in a three stage game, where firms choose locations, the inconvenience, and finally compete in price, on the assumption of a common reservation price. The equilibrium of the game reveals a novel mechanism which induces firms to differentiate their products in moderation by locating halfway to the center and choosing inconvenience such that the market remains covered in equilibrium. Furthermore, using Launhardt's model with differential freight rate, it is shown that the collusive inconvenience is a Nash equilibrium.

Keywords: spatial differentiation; location; market structure; cost of transport; inconvenience; freight rate; business strategies. (search for similar items in EconPapers)
JEL-codes: D21 D43 L11 L13 (search for similar items in EconPapers)
Pages: 29
Date: 2007-05
New Economics Papers: this item is included in nep-com, nep-mic and nep-ure
Note: Ec
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0720

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