Optimal Product Variety in a Hotelling Model
6 Pages Posted: 12 Jun 2011
Date Written: June 9, 2011
In Hotelling style duopoly location games the product variety (or firm locations) is typically not socially optimal. This occurs because the competitive outcome is driven by the density of consumers at the margin while the socially optimal outcome depends on the whole distribution of consumer locations/tastes. We consider a natural extension of the standard model in which firms are imperfectly informed about the distribution of consumers, in particular firms are uncertain about the consumer mean. In the uniform case, as the aggregate uncertainty about the mean becomes large relative to the dispersion of consumers about the mean, competitive locations become socially optimal. A limit result on prices for discontinuous, log-concave densities shows the result will hold in a range of cases.
Keywords: location, product variety, pricing, price discrimination, uncertainty
JEL Classification: C72, D43, D81, L10, L13, R30, R39
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