Recovering the Principle of Minimum Differentiation. An Iceberg Approach

Abstract

The clustering of competitor outlets is a pervasive phenomenon in our cities. However, Hotelling’s principle of minimum differentiation is well-known not to hold. The attempts to modify Hotelling’s model are numerous in the literature on spatial competition, but mostly unsuccessful. We provide a new approach by endogenizing the transportation cost. In particular, we inherit a modeling technique from the literature of international trade. This is the iceberg formulation. With it, we are able to give a rationale to the agglomeration of firms in the middle of a Hotelling linear market.