L10: Product Differentiation Flashcards
product differentiation
price competition with homogenous products dissipate rents
- when a firm increases prices, all demand shifts to a rival
dropping the assumption that firms offer homogenous products
- products will be differentiated, similar but not identical
- close but not perfect substitutes
differentiation can dull price competition, giving firms some local market power
dimensions of product differentiation
horizontal differentiation
- at same price, consumers disagree on product preference ranking
vertical differentiation
- at same price, consumers agree on product preference ranking
- may still differ in their WTP for top/less-ranked products
hotelling model of horizontal differentiation - 1929
products differentiated along single dimension
modelling product space as a linear dimension
- under duopoly, firms A and B locate at points a and b
consumers are distributed uniformly along the line
choosing location only in the hotelling model
nash equilibrium where a = b = 1/2 since neither firm is better off by unilaterally deviating
minimal differentiation since the result is driven by exogenous price assumption
- not letting them exploit market power since we fix prices
- without price competition, they go to the middle to maximise market share
choosing price only in the hotelling model
nash equilibrium in prices at the intersection of the best response functions
extent of departure from perfect competition depends on travel costs, which capture horizontal preferences
- stronger taste for horizontal attributes give firms more market power
choosing location and price in the hotelling model
location choices affect profits in 2 ways
direct effect on their own quantity sold
- always positive and firm always moves to the right to increase the market
strategic effect on the other firm’s price
- always negative
- the more you move to the left, the less competition there is on the other firm, which brings prices up
total effect is negative where strategic effect dominates
- firms optimally decide to be maximally differentiated and go to the extremes
- differentiation weakens price competition
What drives Media Slant? Gentzkow and Shapiro, 2010
is slant/bias in media generated by demand-side or supply-side forces?
newspapers of different slants are targeted to the public and are not related to the slant of the owner itself
- consumer demand responds strongly to newspaper slant
results support hotelling model where readers match with aligned newspaper
results suggest concentration is not an immediate threat for diversity
