Costly horizontal differentiation |
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Authors: | Jo?o Correia-da-Silva Joana Pinho |
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Institution: | (1) CEF.UP, Universidade do Porto, Porto, Portugal;(2) Faculdade de Economia, Universidade do Porto, Porto, Portugal |
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Abstract: | We study the effect of quadratic differentiation costs in the Hotelling model of endogenous product differentiation. The equilibrium
location choices are found to depend on the magnitude of the differentiation costs (relatively to the transportation costs
supported by consumers). When the differentiation costs are low, there is maximum differentiation. When they are high, there
is partial differentiation, with a degree of differentiation that decreases with the differentiation costs. In any case, the
socially optimal degree of differentiation is always lower than the equilibrium level. We also study the case of collusion
between firms. If firms can combine locations but not prices, they locate asymmetrically when differentiation costs are high
and choose maximum differentiation when they are low. When collusion extends to price setting, there is partial differentiation. |
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