Equilibrium in Hotelling's Model of Spatial Competition
Using a partly analytical, partly computational approach we find and study a mixed strategy equilibrium in Hotelling's model of spatial competition (in which each of two firms chooses a location in a line segment, and a price). In the equilibrium we find, the firms randomize only over prices. They choose locations close to the quartiles of the market. The support of the equilibrium price strategy of each firm is the union of two short iintervals, and has an atom of approximate size 0.73 at the highest price. The equilibrium can be interpreted as one in which firms charge a relatively high price most of the time, and occaisionally hold a "sale".
|Date of creation:||Feb 1985|
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- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Gal-or, Esther, 1982. "Hotelling's spatial competition as a model of sales," Economics Letters, Elsevier, vol. 9(1), pages 1-6.
- Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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