Abstract Minimum Differentiation is the equilibrium in spatial models with fixed prices, while firms move apart to reduce the intensity of competition when firms set prices. Nevertheless, firms collocate in many industries where marketing‐active firms compete on price. This puzzle is called the Hotelling paradox. We offer a resolution of this puzzle by noting that imperfect information about the availability of all products can soften competition, allowing firms to produce similar products without engaging in intense price competition. Specifically, we construct a model that predicts minimum differentiation when consumers have low awareness about products and maximum differentiation when they are well informed.
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With advances in technology, the collection of information from consumers at the time of purchase is common in many categories. This information allows a firm to straightforwardly classify consumers as either “new” or “past” consumers. This opens the door for firms to implement marketing that (a) discriminates between new and past consumers and (b) entails making offers to them that are significantly different. Our objective is to examine the competitive effects of marketing that tailors offers to consumers based on their past buying behavior. In a two-period model with two competing firms, we assume that each firm is able to commit about whether or not to implement behavior-based discrimination (BBD), i.e., to add benefits to its offer for past consumers in the second period. When the firms are identical in their ability to add value to the second-period offer, BBD generally leads to lower profits for both firms. Past customers are so valuable in the second period that BBD leads to cutthroat competition in the first period. As a result, the payoffs associated with the implementation of BBD form a prisoner's dilemma. Interestingly, when a firm has a significant advantage over its competitor (one firm has the capability to add more benefits for its past customers than the other), it can increase its profit versus the base case even when there is significant competition in the second period. Moreover, the firm at a disadvantage sometimes finds that the best response to BBD by a strong competitor is to respond with a uniform price and avoid the practice completely.
The objective of this paper is to better understand the factors that competitive news providers consider to design or deliver news programmes. The focus is broadcast news where, in any programming time period, a viewer watches (or consumes) one programme. We assume that each viewer is interested in a limited set of topics and that her utility only comes from the “most interesting” news she observes. The key questions we address are as follows: (a) Should firms adopt designs that facilitate the delivery of more information in their news programmes? (b) Does the decision of firms to implement such strategies depend on the complexity of the news programme (i.e., the number of news stories covered in the news product)? (c) How do such strategies influence competition? We show that firms may or may not benefit by providing better-designed news. The incentive to do this is strongly affected by the complexity of the news product and the intensity of competition between news providers. This paper was accepted by J. Miguel Villas-Boas, marketing.
Conventional wisdom suggests that when firms face a negative externality like gray marketing (i.e., the selling of branded goods outside of the manufacturer’s authorized channels), an effective strategy to reduce the negative impact is to centralize decision making. Nevertheless, in industries with significant gray marketing, we observe many firms with decentralized decision making. Our study assesses whether decentralized decision making can be optimal when a manufacturer faces gray market distribution. We consider a market where a focal firm competes with an existing competitor that produces a differentiated product and a gray marketer that sources an identical product from a lower-priced foreign market. We find that decentralization is optimal under quantity-based competition, provided the gray market is relatively uncompetitive and the level of competitive intensity between the focal firm and the competitor is high. Decentralization leads a firm to make aggressive production decisions, which leads to lower prices, yet it also leads to higher market share for the firm compared to centralization. When the level of competitive intensity between a firm and its competitor is high, the gain in market share more than offsets the loss due to lower prices. As a result, the focal firm is better off decentralizing its operations independent of (a) whether the competitor operates in the foreign market, and (b) the competitor’s organizational structure. This finding contradicts the belief that centralized decision making is always optimal when authorized manufacturers attempt to limit the negative impact of gray markets. The findings also provide insight to understand why firms might employ decentralized decision making in industries where gray markets are active.
