On the Hotelling Principle of Minimum Differentiation: Imitation and Crowd

Abstract

This paper investigates on price competition in the Hotelling location model with linear transportation costs when consumer preferences are affected by the number of consumers shopping at the same store. A consumption externality permits to consider the imitation and the congestion effects which are opposite forces at work. The coexistence of both effects confers new validity to the principle of minimum differentiation as it was in the original Hotelling model. I show that firms do not need to set apart in order to earn higher profits. The results show firms endogenously choose to locate in the center of the interval sharing the market with positive prices.