Principle of minimum differentiation
Two sellers choosing where to sit on a line of customers each move towards the other until both sit at the centre, so competitors end up more alike than the customers would prefer.
Two sellers choosing where to sit on a line of customers each move towards the other until both sit at the centre, so competitors end up more alike than the customers would prefer.
Often misread asReading the clustering result as a general law, when it depends on the particular setting: a line rather than a circle, fixed prices, exactly two sellers, and customers who buy whatever the distance.
How to see it
Both move to the middle, and it is a special case
Two sellers choosing a position along a line of evenly spread customers each find they gain by shuffling towards the other, picking up the middle ground without losing their own end. Both keep moving until both sit at the centre, which suits them and suits hardly any of the customers.
The checkAdd price competition, a third entrant, or customers who give up when the nearest seller is too far, and the sellers spread out again.
Try itPut two ice cream vans on a beach and check that each gains by moving towards the other. Now add a third van, ask where it should go, and ask what the first two then want to do. The clustering does not survive.
Games that show it
Know these first
When it stops being true
- exogenous-prices
- two-contestant-field
Easily confused with
Sources
- Hotelling, H. (1929). Economic Journal 39(153), 41-57.
- d'Aspremont, C., Gabszewicz, J. J. & Thisse, J.-F. (1979). Econometrica 47(5), 1145-1150.