Economics · Spatial Competition and Hotelling 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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- 1Hotelling's model assumes zero transportation costs, which means firms are indifferent between all locations.
- 2The principle ignores that firms maximise revenue rather than profit, so the centre is suboptimal.
- 3Consumers at the centre of the market have inelastic demand, so firms always prefer the extremes.
- 4Once price competition is introduced (Bertrand stage after location choice), firms have an incentive to maximise spatial distance to soften price competition, making central location unstable.✓
Correct answer
Once price competition is introduced (Bertrand stage after location choice), firms have an incentive to maximise spatial distance to soften price competition, making central location unstable.
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