The Principle of Minimum Differentiation revisited: Return of the median voter
Nobuyuki Hanaki, Université Côte d'Azur, CNRS, GREDEG, France
Emily Tanimura, Centre d'économie de la Sorbonne, Université Paris 1, France
Nicolaas J. Vriend, Queen Mary University of London
Journal of Economic Behavior and Organization, 2019, Vol. 157, p. 145-170

pdf Full paper incl. appendices (PDF format)

Abstract. We study a linear location model (Hotelling, 1929) in which n (with n2) boundedly rational players follow (noisy) myopic best-reply behavior. We show through numerical and mathematical analysis that such players spend almost all the time clustered together near the center, re-establishing Hotelling's "Principle of Minimum Differentiation" that had been discredited by equilibrium analyses. Thus, our analysis of the best-response dynamics shows that when considering e.g. market dynamics as well as their policy and welfare implications, it may be important to look beyond equilibrium analyses.

J.E.L. classification codes. C72, D72, L13, R30

Keywords. Hotelling location model, Principle of Minimum Differentiation, Nash equilibrium, Best-response dynamics, Stochastic stability, Invariant measures


Nick Vriend, n.vriend@qmul.ac.uk
Last modified 2019-04-01