Differentiating to Reduce Strategic Uncertainty and Relax Competition

This paper extends a canonical, game-theoretic framework to examine the relationship between product differentiation and relaxed competition. In its theory, firms compete over an infinite-horizon and discount the future so that relaxed competition is feasible in equilibrium. However, firms face strategic uncertainty, so this equilibrium hinges on their beliefs about their rivals' pursuit of relaxed competition. In this setting, certain beliefs can support differentiation and subsequent relaxed competition. Among beliefs that support relaxed competition in equilibrium, "weaker" beliefs induce more investment in differentiation than do "stronger" beliefs. This paper suggests that for relaxing competition, factors like education and sociality may be substitutes for differentiation