Recovering the Principle of Minimum Differentiation. An Iceberg Approach

• Authors: José M. Usategui and Xavier Martínez-Giralt.
• BSE Working Paper: 1052 | September 18
• Keywords: iceberg transport costs , principle of minimum differentiation , hotelling
• JEL codes: L12, D42, R32
• iceberg transport costs
• principle of minimum differentiation
• hotelling

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.