Asymmetric Horizontal Differentiation under Advertising in a Cournot Duopoly

Abstract

Horizontal differentiation is generally derived from the aggregate utility function and is assumed to be symmetric. However, empirical work suggests that asymmetric horizontal differentiation can exist in practice. This paper examines the topic of asymmetric horizontal differentiation by allowing a firm’s costly advertising to have a different impact on its own demand function than it does on that of its rival. This leads to the interesting analytical result that advertising that increases the cross-price effect of its rival can lead to an increase in firm profits. This introduces the possibility of a ‘couple’ effect where firm advertising can tilt its own and its rival’s demand functions in different directions. Several competitive advertising ‘couple’ scenarios are explored using numerical simulation.

Price Competition with Differentiated Products on a Two-Dimensional Plane: The Impact of Partial Cartel on Firms’ Profits and Behavior

“…Liu et al [27] developed a two-stage game where firms make a decision regarding whether to invest to differentiate their products horizontally by considering the duopoly game and strategies based on Cournot and Bertrand competitions. Brady [28] used asymmetric horizontal differentiation in a Cournot duopoly including advertising in the demand function, which also increases the level of differentiation.…”