4 Information

1. Explain “principle of minimum differentiation” using a practical example. Explain the

logic.
- Principle of minimum differentiation: Parties choose the same or very close positions.
When two firms providing the products with identical features, consumers prefer the nearest of
two options. If a firm that chooses to locate to one side of the middle would leave the larger
portion of the market to its competitor. Therefore, this forces both firms to locate in the middle
of the market, very close together. For example, McDonald and Burger King often locates in the
near together.
2. Consider a Stag hunt game and assume that both players have to make their decision at the
same time. It means that player 2 has to make a decision without the information on player 1’s
action. Draw the game tree using information sets. Find equilibria.

If p1 < 0.5, player 2 prefers L.

If p1 > 0.5, player 2 prefers U.
If p1 > 0.5, player 2 is indifferent between U and L.