Optimal Product Variety in a Hotelling Model

6 Pages Posted: 12 Jun 2011

See all articles by Kieron Meagher

Kieron Meagher

Australian National University (ANU)

Date Written: June 9, 2011

Abstract

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

Suggested Citation

Meagher, Kieron, Optimal Product Variety in a Hotelling Model (June 9, 2011). Available at SSRN: https://ssrn.com/abstract=1860583 or http://dx.doi.org/10.2139/ssrn.1860583

Kieron Meagher (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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