Costly horizontal differentiation

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 intermediate, there is partial differentiation, with a degree of differentiation that decreases with the differentiation costs. When they are above a certain threshold, there is no equilibrium. 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.Costly product differentiation, Spatial competition, Hotelling model

Market coverage and the nature of product differentiation: a note

In this note, we analyze the equilibrium outcomes of pricing games with product differentiation in relation with the extent of market coverage. It is a received idea in the IO literature that the horizontal and vertical models of product differentiation are almost formally equivalent. We show that this idea turns out to be wrong when the full market coverage assumption is relaxed. We then argue that there exist two fundamentally different classes of address-models of differentiation, although their difference is not perfectly captured by the standard horizontal/vertical typology.price competition, product differentiation, vertical differentiation, horizontal differentiation

Market coverage and the nature of product differentiation : a note

In this note, we analyze the equilibrium outcomes of pricing games with product differentiation in relation with the extent of market coverage. It is a received idea in the IO literature that the horizontal and vertical models of product differentiation are almost formally equivalent. We show that this idea turns out to be wrong when the full market coverage assumption is relaxed. We then argue that there exist two fundamentally different classes of address-models of differentiation, although their difference is not perfectly captured by the standard horizontal/vertical typologyprice competition, product differentiation

Hotelling's Beach with Linear and Quadratic Transportation Costs: Existence of Pure Strategy Equilibria

In Hotelling type models consumers have the same transportation cost function. We deviate from this assumption and introduce two consumer types. Some consumers have linear transportation costs, while the others have quadratic transportation costs. If at most half the consumers have linear transportation costs, a subgame perfect equilibrium in pure strategies exists for all symmetric locations. Furthermore, no general principle of differentiation holds. With two consumer types, the equilibrium pattern ranges from maximum to intermediate differentiation. The degree of product differentiation depends on the fraction of consumer typesHotelling; Horizontal Product Differentiation; Equilibrium

Verti-zontal Differentiation in Monopolistic Competition

The pattern of trade observed from firm-product-country data calls for a new generation of models. To address the unexplained variation in the data, we propose a new model of monopolistic competition where varieties enter preferences non-symmetrically, capturing both horizontal and vertical differentiation in an unprecedented way. Together with a variable elasticity of substitution, competition effects, varying markups and prices across countries, this results in a tractable model whose predictions differ from existing ones. Using the population of Belgian exporters, our model succeeds in explaining the hitherto unexplained variation. The implications call for a re-thinking of earlier results and measurement practices.Heterogeneous firms, Horizontal differentiation, Vertical differentiation, Monopolistic competition, Non-symmetric varieties

ON WELFARE EFFECTS OF HORIZONTAL MERGERS WITH PRODUCT DIFFERENTIATION

We use a non-spatial (Chamberlinian) product differentiation model to analyze the welfare effects of horizontal mergers with quantity competition. We argue that(i) mergers can be welfare enhancing if the degree of product differentiation increases after the merger; and,(ii) privately profitable mergers can also increase welfare. Consequently, in this paper we demonstrate that the degree of product differentiation is a crucial factor to assess the welfare effects of a merger.Horizontal mergers; product differentiation; welfare.

Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations

We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically dierentiated. While locations are chosen under quality uncertainty, firms choose prices and advertising expenditures being privately informed about their types. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-information benchmark). When vertical differentiation is high, firms choose identical locations and ex post, only the high-quality firm obtains positive profits. Incomplete information and the subsequent signaling activity are shown to increase the set of parameters values for which maximum horizontal differentiation occurs.advertising; location choice; quality; incomplete information; multi-sender signaling game

Choice of new attributes in the 'Elimination by Aspects' duopoly

The "Elimination by aspects" (EBA) duopoly of product differentiation (Laurent, 2006a) was constructed from the discrete model of probabilistic choice worked out by Tversky (1972a,b). In this framework, an unique price equilibrium exists with a "differentiation by attributes", which embodies horizontal and vertical differentiations as possible special cases. This paper extends this analysis by studying a two-stage game in which firms choose the specific attributes of their product and then compete in prices. At the price equilibrium, the "competitive effect", present in pure vertical differentiation models, is replaced by a "differentiation effect" in this EBA duopoly. Subgame perfect Nash equilibria are shown to exist with exogenous costs but also with attributes-dependent unit and fixed costs. At the equilibrium, products are generally differentiated both horizontally and vertically. But a purely vertical outcome may also occur when costs of innovation are strongly convex or when consumers are very sensible to the price levels. When costs are endogenous, the social optimum is achieved for a pure horizontal differentiation. Thus, there is too much differentiation at the equilibrium: the vertical dimension induces a strong raise of prices, which also reduces the welfare.elimination-by-aspects ; product differentiation ; quality choices ; welfare analysis

An Economic Analysis of Platform Sharing

We explore the managerial implications and economic consequences of platform sharing under models of horizontal and vertical product differentiation. By using a common platform across different products, firms can save on fixed costs for platform development. At the same time, platform sharing imposes restrictions on firms' ability to differentiate their products, and this reduces their profitability. It might appear that platform sharing across firms makes consumers worse off because firms cooperate in their product development processes to maximize their joint profit. We find, however, that platform sharing across firms benefits consumers in our framework because it intensifies competition in our horizontal differentiation model, and because it increases the quality of the lower-end product in our vertical differentiation model. We also show new channels through which a merger makes consumers worse off in the presence of platform sharing.

Trade and Variety in a Model of Endogenous Product Differentiation

This paper sets up a model of endogenous product differentiation to analyze the variety effects of international trade. In our model multi-product firms decide not only about the number of varieties they supply but also about the degree of horizontal differentiation between these varieties. Firms can raise the degree of differentiation by investing variety-specific fixed costs. In this setting, we analyze how trade integration, i.e. an increase in market size, influences the number of firms in the market, the number of product varieties supplied by each firm, and the degree of differentiation.Product differentiation, multi-product firms, international trade.