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Recovering the Principle of Minimum Differentiation. An Iceberg Approach

Author

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  • Xavier Martínez-Giralt
  • José M. Usategui

Abstract

The clustering of competitor outlets is a pervasive phenomenon in our cities. However, Hotelling’s principle of minimum differentiation is well-known not to hold. The attempts to modify Hotelling’s model are numerous in the literature on spatial competition, but mostly unsuccessful. We provide a new approach by endogenizing the transportation cost. In particular, we inherit a modeling technique from the literature of international trade. This is the iceberg formulation. With it, we are able to give a rationale to the agglomeration of firms in the middle of a Hotelling linear market.

Suggested Citation

  • Xavier Martínez-Giralt & José M. Usategui, 2018. "Recovering the Principle of Minimum Differentiation. An Iceberg Approach," Working Papers 1052, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1052
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    More about this item

    Keywords

    iceberg transport costs; principle of minimum differentiation; hotelling;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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