On the limits and possibilities of the principle of minimum differentiation

Abstract

Introducing a finite reservation price in Hotelling's spatial duopoly with linear transportation costs shows that (i) there does not exist a pure strategy symmetric location equilibrium if the reservation price is `high', (ii) there is a continuum of (monopolistic) equilibria if the reservation price is `low', and (iii) there exists a unique pure strategy symmetric location equilibrium (in which the two firms compete with each other and cover the entire market) if the reservation price is `intermediate'. The equilibrium distance between the two firms in the latter case is at least a quarter and at most half the length of the market.