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The Principle of Moderate Differentiation

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  • Sallstrom Matthews, S.E.
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    Abstract

    What would happen if firms could collusively choose cost of transport (inconvenience) in Hotelling's spatial model? This paper endogenises inconvenience in a three stage game, where firms choose locations, the inconvenience, and finally compete in price, on the assumption of a common reservation price. The equilibrium of the game reveals a novel mechanism which induces firms to differentiate their products in moderation by locating halfway to the center and choosing inconvenience such that the market remains covered in equilibrium. Furthermore, using Launhardt's model with differential freight rate, it is shown that the collusive inconvenience is a Nash equilibrium.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0720.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0720.

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    Length: 29
    Date of creation: May 2007
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    Handle: RePEc:cam:camdae:0720

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    Web page: http://www.econ.cam.ac.uk/index.htm

    Related research

    Keywords: spatial differentiation; location; market structure; cost of transport; inconvenience; freight rate; business strategies.;

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    1. Christou, Charalambos & Vettas, Nikolaos, 2004. "Location Choices under Quality Uncertainty," CEPR Discussion Papers 4323, C.E.P.R. Discussion Papers.
    2. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Imperfect Competition: On The Existence Of Equilibrium," Discussion Papers 1989_30, Columbia University, Department of Economics.
    3. Graitson, Dominique, 1982. "Spatial Competition a la Hotelling: A Selective Survey," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 13-25, September.
    4. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques-François Thisse, 1985. "The principle of minimum differentiation holds under sufficient heterogeneity," ULB Institutional Repository 2013/1759, ULB -- Universite Libre de Bruxelles.
    5. Eaton, B Curtis & Lipsey, Richard G, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Review of Economic Studies, Wiley Blackwell, vol. 42(1), pages 27-49, January.
    6. Hinloopen, Jeroen & van Marrewijk, Charles, 1999. "On the limits and possibilities of the principle of minimum differentiation1," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 735-750, July.
    7. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
    8. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
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    10. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Stahl, Konrad, 1982. "Differentiated Products, Consumer Search, and Locational Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 97-113, September.
    12. Rothschild, R., 1979. "The effect of sequential entry on choice of location," European Economic Review, Elsevier, vol. 12(3), pages 227-241, July.
    13. Hebert, Robert F, 1981. "Richard Cantillon's Early Contributions to Spatial Economics," Economica, London School of Economics and Political Science, vol. 48(189), pages 71-77, February.
    14. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
    15. Jeroen Hinloopen, 2002. "Price regulation in a spatial duopoly with possible non-buyers," The Annals of Regional Science, Springer, vol. 36(1), pages 19-39.
    16. Spulber, Daniel F, 1981. "Spatial Nonlinear Pricing," American Economic Review, American Economic Association, vol. 71(5), pages 923-33, December.
    17. Gal-or, Esther, 1982. "Hotelling's spatial competition as a model of sales," Economics Letters, Elsevier, vol. 9(1), pages 1-6.
    18. Hebert, Robert F, 1972. "A Note on the Historical Development of the Economic Law of Market Areas," The Quarterly Journal of Economics, MIT Press, vol. 86(4), pages 563-71, November.
    19. B. Curtis Eaton, 1972. "Spatial Competition Revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 5(2), pages 268-78, May.
    20. Shaked, A, 1982. "Existence and Computation of Mixed Strategy Nash Equilibrium for 3-Firms Location Problem," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 93-96, September.
    21. Rodolphe DOS SANTOS FERREIRA, 1998. "Launhardt and Hotelling," Discussion Papers (REL - Recherches Economiques de Louvain) 1998016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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