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Hotelling’s location model with negative network externalities

  • Hans Peters
  • Marc Schröder
  • Dries Vermeulen
Original Paper
  • 144 Downloads

Abstract

We study a variation of Hotelling’s location model in which consumers choose between firms based on travel distances as well as the number of consumers visiting each firm. The model in which the network externality is the same for all firms was proposed by Kohlberg (Econ Lett 11:211–216, 1983), who claims that no equilibrium exists for more than two firms. We assume the network effects to be linear and, in contrast to the claim in Kohlberg (Econ Lett 11:211–216, 1983), derive a condition under which a subgame perfect Nash equilibrium exists for four and six firms. Moreover, we show that for more than two firms the equilibrium locations of the firms are different from the equilibrium locations in Hotelling’s location model. Our results suggest that a subgame perfect Nash equilibrium exists if and only if the number of firms is even. We also provide examples of subgame perfect equilibria in which the network externality is different for some of the firms.

Keywords

Hotelling’s location model Network externalities Subgame perfect Nash equilibrium 

Notes

Acknowledgements

We would like to thank the associate editor and an anonymous referee for detailed comments and useful suggestions. Financial support from the Graduate School of Business and Economics, Maastricht University, is gratefully acknowledged.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Quantitative EconomicsMaastricht UniversityMaastrichtThe Netherlands
  2. 2.School of Business and EconomicsRWTH Aachen UniversityAachenGermany

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