Product differentiation and cartel stability: Chamberlin versus Hotelling

Abstract

This paper contrasts the implications, for cartel stability, of the non-spatial (‘Chamberlinian’) and the spatial (‘Hotelling’) models of product differentiation. Using the special case of a linear demand framework, we show that whereas the former approach suggests that cartel stability is non-monotonic but predictable in the degree of differentiation, the outcome is very much more ambiguous when the latter formulation is employed. We examine also the implications for stability when demand shocks occur, and show that even in the case of linear demand, when differentiation is modelled in spatial terms the results are consistent with non-linear non-spatial demand functions, as well as with those obtained in more complicated models of firm behaviour.