Nesting horizontal and vertical differentiation

We explore a variant of the Hotelling model which allows to nest horizontal and vertical differentiation into a unified setup whose key parameter is the relative natural market size of the firms. In this setup, equilibrium prices increase whenever population's disparity decreases. We also explore the properties of the model in the case of entry by a vertically differentiated product into an otherwise horizontally differentiated industry.

► We extend Hotelling model by allowing for natural markets with different sizes. ► Vertical or horizontal differentiation obtains as a function of population's tastes. ► Less dispersion in the population yields higher equilibrium prices. ► The entry of a vertically differentiated product is considered.