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Hotelling was right with decreasing returns to scale and a coalition-proof refinement

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  • Chia-Hung Sun

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  • Fu-Chuan Lai

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Abstract

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

Suggested Citation

  • Chia-Hung Sun & Fu-Chuan Lai, 2013. "Hotelling was right with decreasing returns to scale and a coalition-proof refinement," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(3), pages 953-971, June.
  • Handle: RePEc:spr:anresc:v:50:y:2013:i:3:p:953-971
    DOI: 10.1007/s00168-012-0528-y
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    References listed on IDEAS

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    1. Bhaskar, V, 1997. "The Competitive Effects of Price-Floors," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 329-340, September.
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    Cited by:

    1. Guo, Wen-Chung & Lai, Fu-Chuan & Zeng, Dao-Zhi, 2015. "A Hotelling model with production," Mathematical Social Sciences, Elsevier, vol. 73(C), pages 40-49.

    More about this item

    Keywords

    D21; L13; R10;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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