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Hotelling (1929) - Stability In Competition (view source)
Revision as of 19:26, 30 September 2012
, 19:26, 30 September 2012→Ernesto Dal Bo's Model
==Ernesto Dal Bo's The Hotelling ModelWith Prices==
As per Hotelling, there is a two stage game:
This gives us a theory of product differentiation - firms differentiate to create monopoly and soften price competition. However, this is inefficient from a social welfare standpoint. The prices are transfers, but the transportation costs are lost. The welfare maximizing location would be <math>\left (\frac{1}{4}, \frac{3}{4} \right) \ne (0,1).\,</math>
If prices are fixed, because of regulation, or as in politics, the competition effect is gone and only the demand effect remains. This leads firms to locate in the center, which is also inefficient (as in Downsian competition for political parties). The `Political ' Hotelling Model is the same as choosing firm location without prices.
