The Principle of Minimum Differentiation Revisited: Return of the Median Voter
Nobuyuki Hanaki, Université Nice Sophia-Antipolis, Skema Business School, and Université Côte d'Azur
Emily Tanimura, Université Paris 1
Nicolaas J. Vriend, Queen Mary University of London
School of Economics and Finance Working Paper No. 792, Queen Mary University of London, 2016
[Also appeared as GREDEG Working Papers Series No. 2016-07; and as Documents de travail du Centre d'Economie de la Sorbonne 2016.37]

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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 the "Principle of Minimum Differentiation" that had been discredited by equilibrium analyses. Thus, our analysis of the best-response dynamics shows that when considering 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 2017-02-04