Hanaki, Nobuyuki Tanimura, Emily Vriend, Nicolaas J.
Working Paper No. 792
Queen Mary University of London, School of Economics and Finance, London
We study a linear location model (Hotelling, 1929) in which n (with n ≥ 2) 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.
Hotelling location model Principle of Minimum Differentiation Nash equilibrium Best-response dynamics Stochastic stability Invariant measures