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Hotelling Was Right About Snob/Congestion Goods (Asymptotically)

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  • Christian Ahlin

    ()
    (Department of Economics, Vanderbilt University)

  • Peter Ahlin

    ()
    (Chatham Financial)

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    Abstract

    We add congestion/snobbery to the Hotelling model of spatial competition. For any firm locations on opposite sides of the midpoint, a pure strategy price equilibrium exists and is unique if congestion costs are strong enough relative to transportation costs. The maximum distance between firms in any pure strategy symmetric location equilibrium declines toward zero as congestion costs increase relative to transportation costs. For any non-zero minimum distance between firms, high enough congestion costs relative to transportation costs guarantee that the unique pure strategy symmetric location equilibrium involves minimum differentiation. In this sense Hotelling was right about differentiation of snob/congestion goods.

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    File URL: http://www.accessecon.com/pubs/VUECON/vu06-w21.pdf
    File Function: First version, 2006
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    Bibliographic Info

    Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0621.

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    Date of creation: Oct 2006
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    Handle: RePEc:van:wpaper:0621

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    Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

    Related research

    Keywords: Hotelling; spatial competition; differentiation; congestion; snobbery;

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    1. Andreas IRMEN & Jean-François THISSE, 1996. "Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9613, Université de Lausanne, Faculté des HEC, DEEP.
    2. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
    3. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October.
    4. André DE PALMA & Luc LERUTH, 1989. "Congestion and Game in Capacity: a Duopoly Analysis in the Presence of Network Externalities," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 389-407.
    5. Grilo, Isabel & Shy, Oz & Thisse, Jacques-Francois, 2001. "Price competition when consumer behavior is characterized by conformity or vanity," Journal of Public Economics, Elsevier, vol. 80(3), pages 385-408, June.
    6. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
    7. Kohlberg, Elon, 1983. "Equilibrium store locations when consumers minimize travel time plus waiting time," Economics Letters, Elsevier, vol. 11(3), pages 211-216.
    8. Frank MATHEWSON & Ralph WINTER, 1989. "The Economic Effects of Automobile Dealer Regulation," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 409-429.
    9. Di Cintio, Marco, 2007. "A note on the Hotelling principle of minimum differentiation: Imitation and crowd," Research in Economics, Elsevier, vol. 61(3), pages 122-129, September.
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    Cited by:
    1. Ahlin, Christian, 2008. "Comment on "A note on the Hotelling principle of minimum differentiation: Imitation and crowd"," Research in Economics, Elsevier, vol. 62(1), pages 55-56, March.

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