Spatial competition with demand uncertainty: A laboratory experiment

Motivated by recent research on product differentiation, we conduct laboratory experiments to study how (aggregate) demand uncertainty influences location choices and price competition in the original Hotelling (1929)’s model. We provide new predictions on the effect of risk attitudes on both decisions under demand uncertainty and confront them with the data. Our experimental results support the predictions that demand uncertainty acts as a differentiation force for risk-neutral and risk-lover subjects. By contrast, we do not verify that demand uncertainty leads risk-averse subjects to agglomerate. This is explained primarily by learning effects and heterogeneous behaviors within this risk profile. Finally, we observe various price-setting behaviors, ranging from an attempt to collude to a price war, depending on the level of differentiation.


Issue Date:
Dec 20 2017
Publication Type:
Working or Discussion Paper
Language:
English
Total Pages:
48
JEL Codes:
C72, C91, D43, L13, R30
Series Statement:
WP17-12




 Record created 2017-12-20, last modified 2018-01-22

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