The Intensity of Competition in the Hotelling Model: A New Generalization and Applications

Kim, Jaesoo (2007): The Intensity of Competition in the Hotelling Model: A New Generalization and Applications.

Abstract

I develop a simple Hotelling model which relates the distribution of consumer preferences to the intensity of competition. I impose two properties, mean preserving spread (MPS) and monotone likelihood ratio property (MLRP), on distribution functions. These properties provide a way to represent the intensity of competition in the Hotelling model. Market competition is less intense as the distribution is dispersed in that the MPS raises firms' equilibrium prices. This approach can describe how the intensity of competition influences the effects of firm's various strategies, which has been largely neglected in most papers. Non-uniform distributions can reverse some well-known results derived under the uniform distribution dramatically. They also allow us to discover new results that the uniform distribution could not demonstrate. As examples, I study three issues such as incentives for innovation, preference based price discrimination, and incentives for information sharing.

• Item Type: MPRA Paper
• Institution: Michigan State University
• Language: English
• Keywords: Hotelling model, intensity of competition, mean-preserving spread (contraction), monotone likelihood ratio property, innovation, preference-based price discrimination, information sharing
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection