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Confidence, Pessimism and their Impact on Product Differentiation in a Hotelling Model with Demand Location Uncertainty

Kauffeldt, Florian ; Wiesenfarth, Boris

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We analyze a Hotelling location-then-price duopoly game under demand uncertainty with uniformly distributed consumers in a standard quadratic costs scenario. The novelty of our approach consists of assuming that firms' beliefs are represented by non-extreme-outcome-additive (neo-additive) capacities. We derive firms' subgame-perfect product design decisions under ambiguity. Furthermore, we investigate the influence of ambiguity and ambiguity attitude on equilibrium product differentiation and contrast our results with an environment of risky firms. We find that the impact of the degree of confidence or ambiguity is particularly significant when it comes to delivering accurate explanations for a wide range of phenomena related to observed product design behavior.

Item Type: Working paper
Series Name: Discussion Paper Series / University of Heidelberg, Department of Economics
Volume: 0562
Date Deposited: 17 Apr 2014 12:47
Date: April 2014
Number of Pages: 49
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Hotelling, Confidence, Optimism, Pessimism, Degree of Ambiguity, Choquet Expected Utility, Neo-additive Capacities, Product Differentiation
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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