A duopoly game under uncertainty about product differentiation: A separating or pooling equilibrium?

Abstract

This article analyses price competition in a two-period duopoly model in which only one firm knows the degree of substitutability between products. Using a Hotelling model, we analyse the informed firm´s incentive to reveal its private information throughout its price set in period 1. In this setting, the price set by the informed firm only reveals the degree of product differentiation in period 1 when the prior probability of closer substitutes is sufficiently high and the discount factor is sufficiently low. Finally, we find that firms differentiate their products as far as possible under asymmetric information.