PRODUCT DIFFERENTIATION UNDER CONGESTION: HOTELLING WAS RIGHT

We introduce negative network externalities—“congestion costs”—into H. Hotelling's (1929) model of spatial competition with linear transportation costs. For any firm locations on opposite sides of the midpoint, a pure strategy price equilibrium exists and is unique if congestion costs are stron...

Ausführliche Beschreibung

Gespeichert in:
Bibliographische Detailangaben
Veröffentlicht in:Economic inquiry 2013-07, Vol.51 (3), p.1750-1763
Hauptverfasser: AHLIN, CHRISTIAN, AHLIN, PETER D.
Format: Artikel
Sprache:eng
Schlagworte:
Online-Zugang:Volltext
Tags: Tag hinzufügen
Keine Tags, Fügen Sie den ersten Tag hinzu!
Beschreibung
Zusammenfassung:We introduce negative network externalities—“congestion costs”—into H. Hotelling's (1929) model of spatial competition with linear transportation costs. For any firm locations on opposite sides of the midpoint, a pure strategy price equilibrium exists and is unique if congestion costs are strong enough relative to transportation costs. We analyze product differentiation and find that Hotelling's Principle of Minimum Differentiation comes closer to holding in the presence of congestion costs. The greater are congestion costs, the less differentiated products can be in (locationally symmetric) equilibrium. In fact, minimum differentiation comes arbitrarily close to holding depending on the magnitude of these costs relative to transportation costs. Intuitively, greater congestion effects stabilize competition at closer quarters, eliminating aggressive pricing equilibria. Thus, negative network externalities can play a significant role in product differentiation. (JEL D21, L15, R12)
ISSN:0095-2583
1465-7295
DOI:10.1111/j.1465-7295.2012.00489.x