Hotelling was right with decreasing returns to scale and a coalition-proof refinement
This paper provides a simple, realistic, and very slightly modified version of the production technology in Hotelling’s (Econ J 39:41–57, 1929 ) spatial model with linear transportation costs to overcome the nonexistence problem of equilibrium—decreasing returns to scale. It is shown that a pure strategy Nash equilibrium in price competition always exists for all location pairs and guarantees uniqueness if we utilize a coalition-proof refinement introduced by Bernheim et al. (J Econ Theory 42:1–12, 1987 ). Decreasing returns to scale reduce the profit a firm can capture through price undercutting and stabilize the price equilibrium due to the increasing average production cost of firms. As a consequence, duopoly firms agglomerating at the center of a line are shown to be at the unique location equilibrium. This paper confers a new validity to the so-called principle of minimum differentiation, in some sense, with the least deviation from the original Hotelling (Econ J 39:41–57, 1929 ) model. Copyright Springer-Verlag 2013
Volume (Year): 50 (2013)
Issue (Month): 3 (June)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://link.springer.com/journal/168|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anderson, Simon P, 1988.
"Equilibrium Existence in the Linear Model of Spatial Competition,"
London School of Economics and Political Science, vol. 55(220), pages 479-91, November.
- Anderson, S., 1986. "Equilibrium existence in the linear model of spatial competition," CORE Discussion Papers 1986013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Prabal Chowdhury & Kunal Sengupta, 2004. "Coalition-proof Bertrand equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(2), pages 307-324, August.
- Zhang, Z John, 1995. "Price-Matching Policy and the Principle of Minimum Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(3), pages 287-299, September.
- Jehiel, Philippe, 1992. "Product differentiation and price collusion," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 633-641, December.
- Takanori Ago, 2008. "Central agglomeration of monopolistically competitive firms," Journal of Economic Geography, Oxford University Press, vol. 8(6), pages 811-823, November.
- d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979.
"On Hotelling's "Stability in Competition","
Econometric Society, vol. 47(5), pages 1145-1150, September.
- Matsumura, Toshihiro & Matsushima, Noriaki, 2011.
"Collusion, agglomeration, and heterogeneity of firms,"
Games and Economic Behavior,
Elsevier, vol. 72(1), pages 306-313, May.
- Toshihiro Matsumura & Noriaki Matsushima, 2009. "Collusion, Agglomeration, and Heterogeneity of Firms," Discussion Papers 2009-05, Kobe University, Graduate School of Business Administration.
- V. Bhaskar & Andrews KY16 9AL UK, 1996.
"The Competitive Effects of Price-Floors,"
- Osborne, Martin J & Pitchik, Carolyn, 1987.
"Equilibrium in Hotelling's Model of Spatial Competition,"
Econometric Society, vol. 55(4), pages 911-922, July.
- Martin J Osborne & Carolyn Pitchik, 1985. "Equilibrium in Hotelling's Model of Spatial Competition," Department of Economics Working Papers 1985-02, McMaster University.
- Stefano Colombo, 2011. "Discriminatory prices and the prisoner dilemma problem," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(2), pages 397-416, April.
- Dixon, Huw, 1990. "Bertrand-Edgeworth Equilibria when Firms Avoid Turning Customers Away," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 131-146, December.
- Economides, Nicholas, 1984. "The principle of minimum differentiation revisited," European Economic Review, Elsevier, vol. 24(3), pages 345-368, April.
- Eber, Nicolas, 1997. "A note on the strategic choice of spatial price discrimination," Economics Letters, Elsevier, vol. 55(3), pages 419-423, September.
- 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.
- James W. Friedman & Jacques-Francois Thisse, 1993.
"Partial Collusion Fosters Minimum Product Differentiation,"
RAND Journal of Economics,
The RAND Corporation, vol. 24(4), pages 631-645, Winter.
- FRIEDMAN, James W. & THISSE, Jacques-François, "undated". "Partial collusion fosters minimum product differentiation," CORE Discussion Papers RP 1070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter.
- Pinkse, Joris & Slade, Margaret E., 1998. "Contracting in space: An application of spatial statistics to discrete-choice models," Journal of Econometrics, Elsevier, vol. 85(1), pages 125-154, July.
When requesting a correction, please mention this item's handle: RePEc:spr:anresc:v:50:y:2013:i:3:p:953-971. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.