The Principle of Minimum Differentiation Revisited
by
Nicholas Economides*
Abstract
Hotelling's model of differentiated products is examined and
modified so that consumers have relatively low reservation prices
for the differentiated products. The problem of existence of a
Nash equilibrium in prices in a duopoly with given products is
analyzed. When the reservation price is relatively low, a Nash
equilibrium exists for a larger range of products than when the
reservation price is infinite. Next I examine product competition
with instantaneous adjustment to the Nash equilibrium prices of the
previous game. Firms competing in a Nash fashion have tendencies
to move away from each other and try to achieve 'local
monopolistic' positions. This is in sharp contrast with the
acclaimed 'Principle of Minimum Differentiation' of the original
model of Hotelling (of high reservation price) where firms
clustered in the product space.
Published in European Economic Review, no. 24, pp. 345-368, (1984).
* Stern School of Business, New York, NY 10012, tel. (212) 998-0864,
fax (212) 995-4218, e-mail:
neconomi@stern.nyu.edu, www:
http://raven.stern.nyu.edu/networks/
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