Differentiation in a Two-Dimensional Market with Endogenous Sequential Entry

TL;DR

This paper explores how endogenous entry influences spatial differentiation in a two-dimensional market, revealing conditions under which firms maximize or minimize differentiation across both dimensions.

Contribution

It extends existing Hotelling models by incorporating endogenous market entry, showing how strategic entry decisions affect spatial differentiation outcomes.

Findings

Market entry strategies influence differentiation levels

Maximum differentiation can occur in both dimensions

Entry deterrence impacts firms' spatial positioning

Abstract

Previous research on two-dimensional extensions of Hotelling's location game has argued that spatial competition leads to maximum differentiation in one dimensions and minimum differentiation in the other dimension. We expand on existing models to allow for endogenous entry into the market. We find that competition may lead to the min/max finding of previous work but also may lead to maximum differentiation in both dimensions. The critical issue in determining the degree of differentiation is if existing firms are seeking to deter entry of a new firm or to maximizing profits within an existing, stable market.