Hotelling's Model with Firms Located Close to Each Other

24 Pages Posted: 24 Mar 2022 Last revised: 22 Jan 2024

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: January 18, 2024

Abstract

Hotelling's model, 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.

Keywords: Hotelling's model, imperfect competition, product differentiation, location model, nonexistence of Nash equilibria, undercut-proof equilibria.

JEL Classification: D43, L13

Suggested Citation

Shy, Oz, Hotelling's Model with Firms Located Close to Each Other (January 18, 2024). Available at SSRN: https://ssrn.com/abstract=4036914 or http://dx.doi.org/10.2139/ssrn.4036914

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://www.frbatlanta.org/research/economists/shy-oz.aspx?panel=1

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