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Spatial competition with demand uncertainty: A laboratory experiment

Aurélie Bonein () and Stéphane Turolla ()

No 17-12, Working Papers SMART - LERECO from INRA UMR SMART-LERECO

Abstract: Motivated by recent research on product differentiation, we conduct laboratory experiments to study how (aggregate) demand uncertainty influences location choices and price competition in the original Hotelling (1929)’s model. We provide new predictions on the effect of risk attitudes on both decisions under demand uncertainty and confront them with the data. Our experimental results support the predictions that demand uncertainty acts as a differentiation force for risk-neutral and risk-lover subjects. By contrast, we do not verify that demand uncertainty leads risk-averse subjects to agglomerate. This is explained primarily by learning effects and heterogeneous behaviors within this risk profile. Finally, we observe various price-setting behaviors, ranging from an attempt to collude to a price war, depending on the level of differentiation.

Keywords: product differentiation; demand uncertainty; price competition; experiment (search for similar items in EconPapers)
JEL-codes: C72 C91 D43 L13 R30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-exp, nep-gth and nep-upt
Date: 2017
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Working Paper: Spatial competition with demand uncertainty: A laboratory experiment (2017) Downloads
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