Spacial Equilibrium in a State Space Approach to Demand Uncertainty

Firms are likely to be uncertain about consumer preferences when launching products. The existing literature models preference uncertainty as an additive shock to the consumer distribution in a characteristic space model. The additive shock only shifts the mean of the consumers' ideal points. We generalize this approach to a state space model in which a vector of parameters can give rise to dierent distributions of consumer tastes in dierent states, allowing other moments of the consumer density to be uncertain. An equilibrium existence result is given. In the case of symmetric distributions, the unique subgame-perfect equilibrium can be described by a simple closed-form solution.