ECON 4950 Lecture 11: Rivalry and Competitive Advantage III (More Product Differentiation)

Choosing Product Characteristics

• Firms choose product characteristics to grab demand.
• In the Hotelling Line model, this involves picking the point to sell from, not necessarily the ends of the line.
• Imagine prices are fixed at $P<em>L = P</em>R = P$. Firms choose location, and consumers buy from the closest vendor.
• This is motivated by the example of ice cream vendors on a boardwalk.

Endogenous Location

• Moving one-fifth of the total distance to the right adds one-tenth of the market share for firm L.
• Firm R will react. Both firms will move to the middle, capturing half of the market each.
• This resembles a political phenomenon where candidates converge to the center.

Endogenous Location and Price Competition

• Reintroduce price competition.
• If firms are at the ends of the line, they each earn profit $c^2$.
• If they are in the middle, it becomes Bertrand competition.
• By undercutting, either firm captures all demand, leading to marginal-cost pricing and zero profit due to poor market structure.

Incentives for Differentiation

• Firms are better off maximally differentiating unless prices are fixed.
• The incentive to