A Location Model with Preference for Variety

Abstract

We propose a new location model where consumers are allowed to make multiple purchases (i.e., one unit from each firm). This model may fit many markets (e.g., newspapers, credit cards) better than existing models. A common feature of these markets is that some consumers are loyal to one brand, while others consume more than one product. Our model yields predictions consistent with this observation. If firms are allowed to choose their locations on the interval, then spatial differentiation may not be maximal and in some cases it may even be minimal. Thus, under certain conditions, we restore Hotelling's Principle of Minimum Differentiation.

Keywords: Hotelling model, Minimum differentiation, Multiple purchases

JEL Classification: D43, L10