Hotelling’s Model with Firms Located Close to Each Other

Oz Shy

Review of Industrial Organization, 2024, vol. 65, issue 3, No 2, 649-668

Abstract: Abstract Hotelling’s model—which is commonly referred to as the “linear city” model—is perhaps the most widely-used model of competition in differentiated products. However, pure-strategy Nash equilibria in prices do not exist unless the firms are located either sufficiently far apart from each other or at the same place. In fact, pure-strategy Nash equilibrium prices exist in only about 15 percent of all possible locations of firms in the linear city. This paper applies the undercut-proof equilibrium concept to solve for equilibrium prices for all possible locations of firms in the linear city.

Keywords: Hotelling’s model; Imperfect competition; Product differentiation; Location model; Nonexistence of Nash equilibria; Undercut-proof equilibria (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11151-024-09975-9

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