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On the insufficiency of some conditions for minimal product differentiation

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The basic framework is Hotelling’s model of product choice with quadratic transportation cost. Duopolists choose locations in the initial period and compete in prices in subsequent infinite periods. The firms share profits on the profit possibility frontier. Friedman and Thisse (Rand J Econ 24:631–645, 1993) provides a set of sufficient conditions for a unique equilibrium and minimal product differentiation in this setting. This paper reexamines those conditions. In the presence of some mild continuity requirements, there is exactly one profit sharing rule which satisfies those conditions. Furthermore, given any discount factor(s), the corresponding profits cannot be the outcome of a subgame perfect Nash equilibrium at every pair of locations. This brings out an inconsistency in the conditions. A slight weakening of the conditions, to allow for a wider class of profit sharing rules, can result in multiple equilibria and minimal product differentiation need not obtain. Two examples demonstrate this. Thus, neither those conditions nor their weaker variants can be used to characterize a unique equilibrium.

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We are thankful to Thomas A. Gresik and Jeffrey M. Thurk for very helpful comments and suggestions. We are also indebted to an anonymous referee whose thoughtful comments led to many improvements in the paper.

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Correspondence to Kali P. Rath.

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Rath, K.P., Zhao, G. On the insufficiency of some conditions for minimal product differentiation. Econ Theory Bull 9, 53–65 (2021).

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