Hotelling Models and Other Spatial Analogs

One of the unfortunate characteristics of the research that employs spatial analysis in dealing with product competition is that so much effort has been expended uselessly in analyzing the ‘‘large group“ or ‘‘tangency solution” case of monopolistic competition.1 As noted in the introduction to Chapter 2 the nature of these efforts will be discussed in Chapter 6. Its temptation is strong, for it permits the derivation of closed analytic price and brand numerical solutions and their examination for comparative static and social welfare considerations. In reality, monopolistic competition structure is not a frequent occurrence, with most firms in an industry acutely aware of rivals with whom they are in close competition. This is especially true of firms when spatial location is explicitly or implicitly present in actual or analogous usage. The assumption of equal and negligible competitive interdependence among differentiated products is not an acceptable assumption when neighboring firms must be expected to be in oligopolistic rivalry.