Economics · Hotelling Location Model
Hotelling's 'Principle of Minimum Differentiation' predicts that competing duopolists will locate at the centre of a linear market. This result breaks down because:
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- 1Both B and C are correct✓
- 2Transport costs are quadratic, not linear, leading to maximum differentiation equilibrium (d'Aspremont et al., 1979)
- 3Price competition between firms located at the centre leads to undercutting that makes central location unprofitable; firms prefer differentiation to soften competition
- 4Firms always prefer maximum differentiation to soften price competition, known as the 'Principle of Maximum Differentiation'
Correct answer
Both B and C are correct
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