** * Preliminary and Incomplete. Comments Welcome. ***

Firms compete against rivals having abilities and resources that are different from their own. I present a simple model of spatial competition that predicts two rivals will (1) more likely to differentiate their products when the gap between their abilities is large, and (2) less likely to differentiate when the market size ratio between product segments is large. I test the predictions in the Chinese national television industry which is occupied by a dominant incumbent and thirty-one newly entered satellite channels. My identification strategy exploits a natural experiment induced by a government policy change that led the incumbent to shift its product location. I find the entrants position themselves on average 12 to 15 percent further away from the incumbent than from peers. Moreover, I find the entrants dynamically adjust their positions to differentiate from the incumbent. The weakest entrants exhibit greatest responsiveness to the incumbent’s actions. Finally, I find the entrants locate closer to the incumbent in timeslots where the market size ratio between product segments is large. This study contributes to a richer understanding of spatial competition strategy by examining a set of conditions under which rivals exhibit different degrees of differentiation