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Hotelling’s Model with Firms Located Close to Each Other

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  • Oz Shy

    (Federal Reserve Bank of Atlanta)

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.

Suggested Citation

  • Oz Shy, 2024. "Hotelling’s Model with Firms Located Close to Each Other," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(3), pages 649-668, November.
    • Handle: RePEc:kap:revind:v:65:y:2024:i:3:d:10.1007_s11151-024-09975-9
    DOI: 10.1007/s11151-024-09975-9
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    More about this item

    Keywords

    Hotelling’s model; Imperfect competition; Product differentiation; Location model; Nonexistence of Nash equilibria; Undercut-proof equilibria;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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