Restoring the Principle of Minimum Differentiation in Product Positioning
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Multi-Purchasing in the Linear City
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by NORA - Norwegian Open Research Archives NORGES HANDELSHØYSKOLE Bergen, Spring 2012 Multi-purchasing in the linear city Håkon Sæberg Advisor: Hans Jarle Kind Master Thesis in Economic Analysis NORGES HANDELSHØYSKOLE This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Neither the institution, the advisor, nor the sensors are - through the approval of this thesis - responsible for neither the theories and methods used, nor results and conclusions drawn in this work. 2 3 Abstract This paper allows for the purchase of both goods in the Hotelling model with linear transport costs. Price competition disappears as a result, and we have a stable linear model with the Principle of Minimum Differentiation intact. Stability is dependent on equal marginal costs for the two producers. The new model lends itself well to bundling. Treating the multi-purchase Hotelling framework under a monopoly, we find that mixed bundling leads to an intermediate level of differentiation with at least half the line between the two goods. Variety is thus greater under a monopoly than under the ordinary duopoly. Media markets, popularly modelled using two-sided markets, are an example of when purchases of multiple brands are common. This paper fills a gap in the literature on multi- homing in two-sided markets. 4 Acknowledgements I am grateful for the support of my advisor, Professor Hans Jarle Kind. Although industrial organization has fascinated me for long, I chose the topic for my thesis based explicitly on whom I could get as an advisor. -
Models of Spatial Competition: a Critical Review
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Biscaia, Ricardo; Mota, Isabel Conference Paper Models of Spatial Competition: A critical review 51st Congress of the European Regional Science Association: "New Challenges for European Regions and Urban Areas in a Globalised World", 30 August - 3 September 2011, Barcelona, Spain Provided in Cooperation with: European Regional Science Association (ERSA) Suggested Citation: Biscaia, Ricardo; Mota, Isabel (2011) : Models of Spatial Competition: A critical review, 51st Congress of the European Regional Science Association: "New Challenges for European Regions and Urban Areas in a Globalised World", 30 August - 3 September 2011, Barcelona, Spain, European Regional Science Association (ERSA), Louvain-la-Neuve This Version is available at: http://hdl.handle.net/10419/120296 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. -
Monopolistic Competition, the Dixit-Stiglitz Model, and Economic
Research in Economics 71 (2017) 798–802 Contents lists available at ScienceDirect Research in Economics journal homepage: www.elsevier.com/locate/rie Monopolistic competition, the Dixit–Stiglitz model, and R economic analysis Joseph E. Stiglitz Columbia University, Columbia Business School, Department of Economics and School of International and Public Affairs, Uris Hall, Room 212 Columbia University 3022 Broadway, New York, NY 10027, USA a r t i c l e i n f o Article history: Available online 26 October 2017 1. Introduction I welcome this opportunity to provide a comment for this Special Issue of Research in Economics honoring forty years since the publication of the Dixit-Stiglitz 1977 paper. I have been pleased both by the way that our simple parameteri- zation has provided a tool that others in a variety of sub-disciplines—growth theory, macro-economics, and international trade—have found so useful. In many ways, I am not surprised—indeed, I was aware of some of these possible applications at the time that we wrote the paper. As I noted in the essay I wrote on the occasion of the 25th anniversary of our paper ( Stiglitz, 2004 ), the standard competitive model—where every firm faces demand curves of infinite elasticity—leads to numerous conundrums. For instance, small open economy could quickly restore itself to full employment by a slight adjustment of the exchange rate—it would easily remedy any deficiency of aggregate demand. In almost all sectors of the economy, firms face downward sloping demand curves, and competition is “imperfect.” Of course, there are many different forms of imperfect competition. -
“Spatial Competition with Unit-Demand Functions”
1072 February 2020 “Spatial competition with unit-demand functions” Gaëtan Fournier, Karine Van der Straeten, And Jörgen W. Weibull Spatial competition with unit-demand functions∗ Gaëtan Fournier,y Karine Van der Straeten,z & Jörgen W. Weibull January 30, 2020 Abstract This paper studies a spatial competition game between two rms that sell a homogeneous good at some pre-determined xed price. A population of consumers is spread out over the real line, and the two rms simultaneously choose location in this same space. When buying from one of the rms, consumers incur the xed price plus some transportation costs, which are increasing with their distance to the rm. Under the assumption that each consumer is ready to buy one unit of the good whatever the locations of the rms, rms converge to the median location: there is minimal dierentiation. In this article, we relax this assumption and assume that there is an upper limit to the distance a consumer is ready to cover to buy the good. We show that the game always has at least one Nash equilibrium in pure strategy. Under this more general assumption, the minimal dierentiation principle no longer holds in general. At equilibrium, rms choose minimal, intermediate or full dierentiation, depending on this critical distance a consumer is ready to cover and on the shape of the distribution of consumers' locations. Keywords: Spatial competition games, horizontal dierentiation, willingness to pay 1 Introduction The choice of product characteristics - and strategic product dierentiation in particular - is a central issue in Industrial Organization. A large number of studies on this topic build on Hotelling's seminal model of rm location (Hotelling [1929]). -
Explanatory Value in Context the Curious Case of Hotelling's
Published version: Aydinonat, N. Emrah & Emin Köksal (2019) Explanatory value in context: the curious case of Hotelling’s location model, The European Journal of the History of Economic Thought, 26:5, 879-910, DOI: 10.1080/09672567.2019.1626460 Explanatory Value in Context The Curious Case of Hotelling’s Location Model N. Emrah Aydinonat & Emin Köksal 1 Abstract There is a striking contrast between the significance of Harold Hotelling’s contribution to industrial economics and the fact that his location model was invalid, unrealistic and non- robust. It is difficult to make sense of the explanatory value of Hotelling’s model based on philosophical accounts that emphasize logical validity, representational adequacy, and robustness as determinants of explanatory value. However, these accounts are misleading because they overlook the context within which the explanatory value added of a model is apprehensible. We present Hotelling’s model in its historical context and show why it is an important and explanatory model despite its apparent deficiencies. Keywords: Spatial competition, Harold Hotelling, Hotelling model, product differentiation, principle of minimum differentiation, explanatory value, representational adequacy, robustness, logical validity. JEL Codes: B00, B21, B31, B41, L10 Introduction In 1929, Harold Hotelling published what was to become a highly influential paper in economics: Stability in Competition, in which he presented a simple model of competition between two sellers selling an identical product in a linear and bounded market. The model, according to Hotelling, showed why “buyers are confronted everywhere with an excessive sameness” (1929, 54, emphasis added). This result is today known as the principle of minimum differentiation (also known as the Hotelling Law, Boulding 1966, 484). -
Spatial Competition with Unit-Demand Functions∗
Spatial competition with unit-demand functions∗ Gaëtan Fournier,y Karine Van der Straeten,z & Jörgen W. Weibull§ January 31, 2020 Abstract This paper studies a spatial competition game between two firms that sell a homogeneous good at some pre-determined fixed price. A population of consumers is spread out over the real line, and the two firms simultaneously choose location in this same space. When buying from one of the firms, consumers incur the fixed price plus some transportation costs, which are increasing with their distance to the firm. Under the assumption that each consumer is ready to buy one unit of the good whatever the locations of the firms, firms converge to the median location: there is “minimal differentiation”. In this article, we relax this assumption and assume that there is an upper limit to the distance a consumer is ready to cover to buy the good. We show that the game always has at least one Nash equilibrium in pure strategy. Under this more general assumption, the “minimal differentiation principle” no longer holds in general. At equilibrium, firms choose “minimal”, “intermediate” or “full” differentiation, depending on this critical distance a consumer is ready to cover and on the shape of the distribution of consumers’ locations. Keywords: Spatial competition games, horizontal differentiation, willingness to pay 1 Introduction The choice of product characteristics - and strategic product differentiation in particular - is a central issue in Industrial Organization. A large number of studies on this topic build on Hotelling’s seminal model of firm location (Hotelling [1929]). In Hotelling’s model, consumers are uniformly distributed on a line. -
Empirical Models of Entry and Market Structure 1
Empirical Models of Entry and Market Structure 1 Steven Berry Peter Reiss Yale Univ. and NBER Stanford Univ. and NBER [email protected] [email protected] June 26, 2006 1Draft Chapter for Volume III of the Handbook of Industrial Organization. Please do not circulate or cite without the authors’ permission. Abstract This chapter surveys empirical models of market structure. We pay particular atten- tion to equilibrium models that interpret cross-sectional variation in the number of firms or firm turnover rates. We begin by discussing what economists can in principle learn from models with homogeneous potential entrants. We then turn to models with heterogeneous firms. In the process, we review applications that analyze market structure in airline, retail, professional, auction, lodging, and broadcasting markets. We conclude with a summary of more recent models that incorporate incomplete information, “set identified” parameters, and dynamics. 1 Introduction Industrial organization (IO) economists have devoted substantial energy to under- standing market structure and the role that it plays in determining the extent of market competition.1 In particular, IO economists have explored how the number and organization of firms in a market, firms’ sizes, potential competitors, and the extent of firms’ product lines affect competition and firm profits. This research has shaped the thinking of antitrust, regulatory and trade authorities who oversee market structure and competition policies. For example, antitrust authorities regularly pose and answer the question: How many firms does it take to sustain competition in this market? Others ask: Can strategic investments in R&D, advertising and capacity deter entry and reduce competition? Firms themselves are interested in knowing how many firms can ‘fit’ in a market. -
Lecture Notes on Industrial Organization
1 Lecture Notes on Industrial Organization (I) Chien-Fu CHOU January 2004 2 Contents Lecture 1 Introduction 1 Lecture 2 Two Sides of a Market 3 Lecture 3 Competitive Market 8 Lecture 4 Monopoly 11 Lecture 5 Basis of Game Theory 20 Lecture 6 Duopoly and Oligopoly { Homogeneous products 32 Lecture 7 Differentiated Products Markets 46 Lecture 8 Concentration, Mergers, and Entry Barriers 62 Lecture 9 Research and Development (R&D) 81 Lecture 10 Network Effects, Compatibility, and Standards 93 Lecture 11 Advertising 102 Lecture 12 Quality 109 Lecture 13 Pricing Tactics 112 Lecture 14 Marketing Tactics: Bundling, Upgrading, and Dealerships 114 1 1 Introduction 1.1 Classification of industries and products 2M¬Å¼¹™Ä}é, 2M¬ÅW“™Ä}é; «%Íß%’eé. 1.2 A model of industrial organization analysis: (FS Ch1) Structuralist: 1. The inclusion of conduct variables is not essential to the development of an operational theory of industrial organization. 2. a priori theory based upon structure-conduct and conduct-performance links yields ambiguous predictions. 3. Even if a priori stucture-conduct-performance hypotheses could be formulated, attempting to test those hypotheses would encounter serious obstacles. Behaviorist: We can do still better with a richer model that includes intermediate behavioral links. 1.3 Law and Economics Antitrust law, t>q¶ Patent and Intellectual Property protection ù‚DN‹ß\ˆ Cyber law or Internet Law 昶 1.4 Industrial Organization and International Trade 2 Basic Conditions Supply Demand Raw materials Price elasticity Technology Substitutes -
Duopolistic Competition and Monetary Policy
Duopolistic Competition and Monetary Policy Kozo Ueda∗ December 27, 2020 Abstract A standard macroeconomic model based on monopolistic competition (Dixit{Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the im- plications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic comple- mentarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit{Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy. Keywords: duopoly; monetary policy; strategic complementarities; New Keynesian model JEL classification: D43, E32, E52 ∗Waseda University (E-mail: [email protected]). The author thanks seminar participants at the Bank of Japan for useful comments and suggestions. This research is funded by JSPS Grants-in-Aid for Scientific Research (16KK0065 and 18H05217). All remaining errors are my own. 1 1 Introduction The model of monopolistic competition developed by Dixit and Stiglitz (1977) provides a simple way to analyze firms’ price-setting behavior, which in turn enables us to study the effects of monetary policy in tractable macroeconomic models (see also Blanchard and Kiy- otaki 1987). -
Faculdade De Economia Do Porto – Universidade Do Porto Programa De Doutoramento Em Economia
Faculdade de Economia do Porto – Universidade do Porto Programa de Doutoramento em Economia History of Economic Thought Prof. Roger E. Backhouse Space in Economics – a Historical Perspective João Oliveira Correia da Silva Contents 1. Science, Models and Economic Space.. 4 2. The Hall of Fame ................................ 8 2.1. Early Spatial Economic Thought ................................... 12 2.2. Von Thünen’s Isolated State......................................... 16 2.3. A Quiet but Fertile Interlude......................................... 18 2.4. Marshall’s Industrial Districts ...................................... 20 2.5. Weber’s Location Theory............................................... 23 2.6. Marginalism and Spatial Oligopoly ................................ 25 2.7. Heckscher-Ohlin Trade Theory...................................... 27 2.8. Lösch’s General Equilibrium......................................... 29 2.9. Myrdal’s Cumulative Causation .................................... 32 3. A Taxonomy of Spatial Economics..... 35 4. Modern Theories ............................... 40 4.1. Location Theory............................................................ 41 4.1.1. The Static Problem of Firm Location ..................................... 41 4.1.2. Interdependence and Spatial Competition............................. 43 4.1.3. Spatial Equilibrium .............................................................. 45 4.2. Spatial Organization ..................................................... 47 4.2.1. Urban Rents and -
A Location Model with Preference for Variety
A Location Model with Preference for Variety Hyunho Kim∗ Konstantinos Serfes† December 27, 2003 Abstract Weproposeanewlocationmodelwhereconsumersareallowedtomakemultiplepurchases (i.e., one unit from each Þrm). This model Þts many markets (e.g. newspapers, credit cards, scholarly journals, subscriptions to TV channels, etc.) better than existing models. A common feature of these markets is that some consumers are loyal to one brand, while others consume more than one product. Our model yields predictions consistent with this observation. More- over, it restores Hotelling’s Principle of Minimum Differentiation, by generating an equilibrium in pure strategies and with a linear transportation cost, where Þrms are located at the center and charge prices above marginal cost. JEL ClassiÞcation Codes: D43; L10. Keywords: Hotelling model; Minimum differentiation; Preference for variety. ∗Department of Economics, SUNY at Stony Brook, Stony Brook, NY 11794-4384. E-mail: [email protected]. †Department of Economics, SUNY at Stony Brook, Stony Brook, NY 11794-4384. E-mail: kser- [email protected]. Phone: (631) 632-7562. Fax: (631) 632-7516. 1 1 Introduction Hotelling (1929), in his seminal paper, introduced a model of spatial competition where two Þrms are located at the two end points of a busy street producing homogeneous products. Consumers have unit demands, are uniformly distributed on the street and each one buys from the Þrm which offers the best deal in terms of price and distance that has to be travelled. Later versions of that model have relaxed a number of Hotelling’s assumptions, but the one that is Þrmly maintained is that consumers purchase from one Þrm exclusively.