Maximal Differentiation or Minimal Differentiation? Signal Jamming in Location Competition in Duopoly

ABSTRACT In this study, we argue that the result of maximal differentiation by d’Aspremont et al. (1979) is not robust against all variations in qualities. The result that two firms are located at opposite ends of a linear city holds only when the product qualities are identical or similar. Sufficiently large quality differences lead to minimal differentiation with firms choosing identical locations. If quality differences are moderate, both maximal and minimal differentiation can emerge as equilibrium outcomes. If firms possess common private information about qualities unknown to consumers, their location choices may signal quality. However, these firms may attempt to jam unfavourable signals from rival firms. We demonstrate that a separating equilibrium exists in which such cross‐signal jamming does not succeed. Equilibrium locations can be distorted to prevent a significantly lower‐quality firm from mimicking a moderately lower‐quality one, ensuring survival in competition. Consequently, intermediate differentiation, unattainable under complete information, may arise in equilibrium when firms possess common private quality information.