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Mingzhi Li, Dale Stahl and Andrew B. Whinston
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Mingzhi Li: Tsinghua University
Andrew B. Whinston: University of Texas at Austin

No 356, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: The unprecedented easiness of exchanging information among consumers on the internet could add another dimension to the firms' competition against each other. In this paper, we introduce consumers' learning from each other about the degree of product differentiation into a Hotelling duopoly model, and investigate how the consumers' learning behaviors affect the market equilibria. We show that in equilibrium it could be optimal for the two firms to charge different prices and set up a "window of complaints" to reduce the consumers' uncertainty on product differentiation. Communication among consumers through word of mouth can help explain the existence of price dispersion in a duopolistic market. We also discuss some implications of the public good aspect of information about product differentiation

Date: 2000-07-05
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