Discussion Papers

No.917 Imitation Versus Differentiation: Balance Between Product Similarities and Differences in a Hotelling Model

by Koichiro KIMURA

January 2024


Firms not only differentiate their products to increase their market power but also imitate the successful product characteristics of their competitors to increase their market power or neutralize that of their competitors. Although many studies have been conducted on differentiation and imitation, the balance of product similarities and differences in each industry has not been explicit. Hence, this study introduces the concept of imitation and the costs of differentiation and imitation into the Hotelling model to analyze both. Thereby, this analysis shows that firms need not only to differentiate but also to imitate from each other to maximize profits. Thus, increasing product similarities between firms in an industry characterizes that industry as different from others; increasing product differences between firms in an industry increases the diversity of products in that industry.

Keywords: differentiation, the Hotelling model, imitation, industrial variety, product variety
JEL classification: D21, O3

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