Hotelling's Main Street Model: Undercut-Proof Equilibrium as a Constrained Optimization Problem

Stephen Martin

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: The paper analyzes a two-stage Main Street model. In the second stage, taking locations as given, each of two firms sets price to maximize own profit, subject to the constraint that it is not profitable for the other firm to undercut its price at its location. We find constrained price best-response equations and pure-strategy equilibrium prices for all pairs of locations. In the first stage, firms noncooperatively pick locations to maximize second-stage payoffs. We find location best-response equations and equilibrium locations. Equilibrium locations are efficient in the sense of minimizing transportation cost.

Keywords: Main Street; Hotelling; price undercutting (search for similar items in EconPapers)
JEL-codes: C72 D21 D43 L13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2025-05
New Economics Papers: this item is included in nep-com and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1354

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