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An experimental study on multi-dimensional spatial product differentiation

Author

Listed:
  • Przemysław Kusztelak

    (Faculty of Economic Sciences, University of Warsaw)

Abstract

This study presents the results of an experiment on spatial differentiation of products in Hotelling-type models with different grades of complexity for companies’ choices of space. Three models were compared, including models with a single decision variable (single-dimensional space with automatically calculated prices), two decision variables (single-dimensional space with prices assigned by the participants) and three decision variables (bi-dimensional space with prices assigned by the participants). The research revealed that in more complex conditions, the product differentiation was smaller and that the prices were lower than in a simple environment when the Nash equilibrium was confirmed. Companies that function in complex conditions do not take advantage of the opportunity to make high profits based on product differentiation. This has a greater impact on price rigidity with respect to product variety than could be theoretically predicted. Strategies based on product differentiation are, therefore, less profitable than expected based on theoretical predictions.

Suggested Citation

  • Przemysław Kusztelak, 2011. "An experimental study on multi-dimensional spatial product differentiation," Working Papers 2011-11, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2011-11
    as

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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP51.pdf
    File Function: First version, 2011
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    References listed on IDEAS

    as
    1. Brenner, Steffen, 2001. "Hotelling games with three, four, and more players," SFB 373 Discussion Papers 2001,23, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    2. Brown-Kruse, Jamie & Cronshaw, Mark B & Schenk, David J, 1993. "Theory and Experiments on Spatial Competition," Economic Inquiry, Western Economic Association International, vol. 31(1), pages 139-165, January.
    3. 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.
    4. Braid, Ralph M., 1999. "The price and profit effects of horizontal mergers in two-dimensional spatial competition," Economics Letters, Elsevier, vol. 62(1), pages 113-119, January.
    5. Steffen Brenner, 2005. "Hotelling Games with Three, Four, and More Players," Journal of Regional Science, Wiley Blackwell, vol. 45(4), pages 851-864, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    spatial competition; product differentiation; laboratory experiments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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