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Probalilistic duopoly with differentiation by attributes

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  • Laurent Reynald-Alexandre

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper proposes a discrete choice duopoly in which products are described and differentiated by their specific attributes. These attributes can be discrete characteristics or differences in continuous variables, such as prices or qualities. Consumers follow a probabilistic reasoning which is consistent with random decision rule models such as Tversky's "Elimination by Aspects" framework (1972a,b). This type of behavior is relevant for small everyday life purchases. The demand system provides a general structure of product differentiation in which special cases are given by classical models of horizontal and vertical differentiation. Existence and uniqueness of a price Nash equilibrium in pure strategies are established in the duopoly. When attributes' utilities vary, comparative statics properties of profits can be explained by "attractiveness" and "differentiation" effects. These effects are combined in a new way compared to the deterministic structures or to the logit duopoly. For example, an increase in the low utility index of attributes strengthens product differentiation.

Suggested Citation

  • Laurent Reynald-Alexandre, 2007. "Probalilistic duopoly with differentiation by attributes," PSE Working Papers halshs-00587847, HAL.
    • Handle: RePEc:hal:psewpa:halshs-00587847
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00587847
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    References listed on IDEAS

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    1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
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