Hotelling model with heterogeneous firms

The Hotelling model is the workhorse model in the study of spatial competition since it was first proposed in Hotelling (1929), and has been widely applied to various fields of studies, such as industrial organization, urban planning and political economy. A notable finding, due to Eaton and Lipsey...

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Main Authors: Ler, Jun Yi, Low, Jing Mei Cheryl, Ng, Qin Hui
Other Authors: School of Humanities and Social Sciences
Format: Final Year Project
Language:English
Published: 2017
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Online Access:http://hdl.handle.net/10356/72733
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-727332019-12-10T12:27:32Z Hotelling model with heterogeneous firms Ler, Jun Yi Low, Jing Mei Cheryl Ng, Qin Hui School of Humanities and Social Sciences Au Pak Hung DRNTU::Social sciences The Hotelling model is the workhorse model in the study of spatial competition since it was first proposed in Hotelling (1929), and has been widely applied to various fields of studies, such as industrial organization, urban planning and political economy. A notable finding, due to Eaton and Lipsey (1975), is that a pure-strategy Nash equilibrium does not exist with three competing firms in the Hotelling model. This finding is quite counter-intuitive, as pure-strategy Nash equilibria exist for any other number of firms. Moreover, the existing literature has focused mainly on the case of identical firms, and overlooked the location competition among heterogeneous firms, a case that is clearly of greater empirical relevance. This paper aims to advance our understanding of location competition by addressing the two aforementioned issues. Specifically, we investigate a standard Hotelling model with three firms and identify conditions under which a pure-strategy Nash equilibrium exists with three identical firms. We then incorporate quality variation into the benchmark Hotelling model, and characterize a pure-strategy Nash equilibrium. In the equilibrium, higher quality firms would locate themselves near the corners, whereas the lowest quality firms would locate itself in the middle. This finding is in sharp contrast to the Principle of Minimal Differentiation (Boulding, 1966), which asserts that firms would congregate at the middle when positioning their products. Bachelor of Arts 2017-11-03T06:18:22Z 2017-11-03T06:18:22Z 2017 Final Year Project (FYP) http://hdl.handle.net/10356/72733 en Nanyang Technological University 42 p. application/pdf
institution Nanyang Technological University
building NTU Library
country Singapore
collection DR-NTU
language English
topic DRNTU::Social sciences
spellingShingle DRNTU::Social sciences
Ler, Jun Yi
Low, Jing Mei Cheryl
Ng, Qin Hui
Hotelling model with heterogeneous firms
description The Hotelling model is the workhorse model in the study of spatial competition since it was first proposed in Hotelling (1929), and has been widely applied to various fields of studies, such as industrial organization, urban planning and political economy. A notable finding, due to Eaton and Lipsey (1975), is that a pure-strategy Nash equilibrium does not exist with three competing firms in the Hotelling model. This finding is quite counter-intuitive, as pure-strategy Nash equilibria exist for any other number of firms. Moreover, the existing literature has focused mainly on the case of identical firms, and overlooked the location competition among heterogeneous firms, a case that is clearly of greater empirical relevance. This paper aims to advance our understanding of location competition by addressing the two aforementioned issues. Specifically, we investigate a standard Hotelling model with three firms and identify conditions under which a pure-strategy Nash equilibrium exists with three identical firms. We then incorporate quality variation into the benchmark Hotelling model, and characterize a pure-strategy Nash equilibrium. In the equilibrium, higher quality firms would locate themselves near the corners, whereas the lowest quality firms would locate itself in the middle. This finding is in sharp contrast to the Principle of Minimal Differentiation (Boulding, 1966), which asserts that firms would congregate at the middle when positioning their products.
author2 School of Humanities and Social Sciences
author_facet School of Humanities and Social Sciences
Ler, Jun Yi
Low, Jing Mei Cheryl
Ng, Qin Hui
format Final Year Project
author Ler, Jun Yi
Low, Jing Mei Cheryl
Ng, Qin Hui
author_sort Ler, Jun Yi
title Hotelling model with heterogeneous firms
title_short Hotelling model with heterogeneous firms
title_full Hotelling model with heterogeneous firms
title_fullStr Hotelling model with heterogeneous firms
title_full_unstemmed Hotelling model with heterogeneous firms
title_sort hotelling model with heterogeneous firms
publishDate 2017
url http://hdl.handle.net/10356/72733
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