Customer Needs and Solutions

, Volume 3, Issue 1, pp 42–47 | Cite as

Maximal or Minimal Differentiation in a Hotelling Market? A Fresh Perspective

Research Article

Abstract

A perplexing problem in spatial modelling—going back to Hotelling’s linear market—is whether firms will cluster together or separate themselves. Maximal differentiation is the prevailing equilibrium when travel costs are quadratic and minimal differentiation results when price competition is limited. The reality for most markets is that the force that draws firms together (maximize demand) and the force that causes them to separate (avoid price competition) are both present. In many cases, this makes the characterization of an equilibrium difficult. The vast majority of research using the Hotelling model is based on the assumption that all potential consumers buy, yet the reality of many markets is that there are some consumers who seriously consider not buying. When allowing for the possibility that some consumers would consider not buying from either firm, we are able to identify equilibrium locations for firms that first choose locations and then prices in a Hotelling market with linear travel costs. Following the discussion above, we consider ranges of consumers’ willingness to pay for the products relative to the outside good such that the market is not necessarily covered for all location choices. The analysis demonstrates the existence of a pure-strategy location equilibrium, supported by a pure-strategy pricing equilibrium, where firms are moderately differentiated and the market is covered.

Keywords

Differentiation Positioning Price competition Pure-strategy equilibrium 

JEL Classification

L13 D43 

References

  1. 1.
    d’Aspremont C, Gabszewicz JJ, Thisse J-F (1979) On Hotelling’s ‘stability in competition’. Econometrica 47(5):1145–1150CrossRefGoogle Scholar
  2. 2.
    Dasgupta P, Maskin E (1986) The existence of equilibrium in discontinuous economic games, I: theory. Rev Econ Stud 53(1):1–26CrossRefGoogle Scholar
  3. 3.
    Davis P (2006) Spatial competition in retail markets: movie theaters. RAND J Econ 37(4):964–982CrossRefGoogle Scholar
  4. 4.
    Eaton C, Lipsey RG (1975) The principle of minimum differentiation reconsidered: some new developments in the theory of spatial competition. Rev Econ Stud 42(1):27–49CrossRefGoogle Scholar
  5. 5.
    Grossman GM, Shapiro C (1984) Informative advertising with differentiated product. Rev Econ Stud 51(164):63–81CrossRefGoogle Scholar
  6. 6.
    Hotelling H (1929) Stability in competition. Econ J 39(153):41–57CrossRefGoogle Scholar
  7. 7.
    Iyer G (1998) Coordinating channels under price and non-price competition. Mark Sci 17(4):338–355CrossRefGoogle Scholar
  8. 8.
    Kotler P, Keller K (2012) Marketing management. Prentice Hall, New York, pp 314–317Google Scholar
  9. 9.
    Osborne MJ, Pitchik C (1987) Equilibrium in Hotelling’s model of spatial competition. Econometrica 55(4):911–922CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Amit Pazgal
    • 1
  • David Soberman
    • 2
  • Raphael Thomadsen
    • 3
  1. 1.Rice UniversityHoustonUSA
  2. 2.Rotman School of ManagementUniversity of TorontoTorontoCanada
  3. 3.Olin Business SchoolWashington University in St. LouisSt. LouisUSA

Personalised recommendations