Hotelling (1929) - Stability In Competition

• This page is referenced in BPP Field Exam Papers

Reference(s)

• Hotelling, H. (1929), "Stability in competition", Economic Journal 39, 41-57. pdf

Abstract

After the work of the late Professor F. Y. Edgeworth one may doubt that anything further can be said on the theory of competition among a small number of entrepreneurs. However, one important feature of actual business seems until recently to have escaped scrutiny. This is the fact that of all the purchasers of a commodity, some buy from one seller, some from another, in spite of moderate differences of price. If the purveyor of an article gradually increases his price while his rivals keep theirs fixed, the diminution in volume of his sales will in general take place continuously rather than in the abrupt way which has tacitly been assumed. A profound difference in the nature of the stability of a competitive situation results from this fact. We shall examine it with the help of some simple mathematics. The form of the solution will serve also to bring out a number of aspects of a competitive situation whose importance warrants more attention than they have received. Among these features, all illustrated by the same simple case, we find (1) the existence of incomes not properly belonging to any of the categories usually discussed, but resulting from the discontinuity in the increase in the number of sellers with the demand; (2) a socially uneconomical system of prices, leading to needless shipment of goods and kindred deviations from optimum activities; (3) an undue tendency for competitors to imitate each other in quality of goods, in location, and in other essential ways.