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

  • Chia-Hung Sun

    ()

  • Fu-Chuan Lai

    ()

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    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

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    File URL: http://hdl.handle.net/10.1007/s00168-012-0528-y
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    Article provided by Springer in its journal The Annals of Regional Science.

    Volume (Year): 50 (2013)
    Issue (Month): 3 (June)
    Pages: 953-971

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    Handle: RePEc:spr:anresc:v:50:y:2013:i:3:p:953-971
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    1. 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.
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