Competition in multiple characteristics: An empirical test of location equilibrium

• I study the location equilibrium in a two-dimensional product differentiation model.
• I have developed a theoretical model incorporating town size.
• The analysis is applied to the movie theatre market.
• The empirical test of the equilibrium supports the theoretical predictions.
• Longer distance between firms does not imply higher prices.

With products differentiated in multiple dimensions, the location equilibrium for a duopolistic market exhibits maximum differentiation in one dimension and minimum differentiation in all the other dimensions. This paper analyses whether this equilibrium arises using real data for the Spanish movie theatre exhibition market where the firms (cinemas) are differentiated along two main dimensions (their geographical location and the set of movies exhibited). Data not only shows a trade-off, in that closer theatres tend to choose a higher proportion of different movies, but also that there is a tendency towards either max–min or min–max product differentiation.