Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right

CEPR Discussion Paper Series 1446

Posted: 8 Jan 1997

See all articles by Andreas Irmen

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: October 1996

Abstract

Lancasterian models of product differentiation typically assume a one-dimensional characteristics space. We show that standard results on prices and locations no longer hold when firms compete in a multi-characteristics space. In the location game with n characteristics, firms choose to maximize differentiation in the dominant characteristic and to minimize differentiation in the others when the salience coefficient of the former is sufficiently large. Thus, the principle of minimum differentiation holds for all but one characteristic. Furthermore, prices do not necessarily fall when products get closer in the characteristics space because price competition is relaxed when products are differentiated enough in the dominant characteristic.

JEL Classification: L1, M3, R3

Suggested Citation

Irmen, Andreas and Thisse, Jacques-François, Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right (October 1996). CEPR Discussion Paper Series 1446. Available at SSRN: https://ssrn.com/abstract=4537

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Jacques-François Thisse (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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