COMPETITION IN MULTI-CHARACTERISTICS SPACES - HOTELLING WAS ALMOST RIGHT

Lancasterian models of product differentiation typically assume a one- dimensional characteristics space. We show that standard results on pr ices and locations no longer hold when firms compete in a multi-charac teristics space. In the location game with n characteristics, firms ch oose to maximize differentiation in the dominant characteristic and to minimize differentiation in the others when Ihc salience coefficient of the former is sufficiently large, Thus, the principle of minimum di fferentiation holds for all but one characteristic. Furthermore, price s do not necessarily fall when products get closer in the characterist ics space because price competition is relaxed when products are diffe rentiated enough in the dominant characteristic. (C) 1998 Academic Pre ss.