Monday, June 13, 2011
Posted by D. Daniel Sokol
Przemyslaw Kusztelak (Faculty of Economic Sciences, University of Warsaw) undertakes An experimental study on multi-dimensional spatial product differentiation.
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.