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Product Differentiation and the Intensity of Price Competition
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 117 (1997), Iss. 2 : pp. 247–256
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Baake, Pio
Oechssler, Jörg
Abstract
We consider a Hotelling-type product differentiation model with customers that are concentrated symmetrically around the center of the distribution, which seems to be a realistic assumption in many settings. We explain why a symmetric equilibrium may fail to exist. The reason is that the intensity of competition may decrease drastically when a firm moves away from its competitor. Despite the non-existence of symmetric equilibria there may exist asymmetric equilibria but those are generally characterized by strong product differentiation between the firms, with the possibility that one firm locates outside the support of the customer distribution.