Do Consumers' Preferences Really Matter? - A Note on Spatial Competition with Restricted Strategies

Abstract

In the framework Hotelling-Downs competition two players can freely choose a position along a one-dimensional market. We introduce restrictions of feasible strategies and analyze the consequences for players and consumers. In equilibrium players may minimally differentiate away from the center of the market and even locate completely independently of consumers' preferences. We provide conditions for these novel cases as well as for the standard result that players locate on the median of the distribution of consumers. In addition to the short run, where restrictions are fixed, we elaborate on the long run by studying the players' choice of restrictions under (potential) market entry. In both settings, we find an inefficient outcome, in which a firm is capable of offering a product at the center of the market, but instead chooses a position that is worse for most of the consumers