Topic 2: Essay Plans
1. Explain why Hotelling (1929, p.54) concluded that: “Buyers are confronted everywhere with an
excessive sameness.” Discuss the conditions for which this conclusion is not correct.
> Explain ‘excessive sameness’ means same location/product specifications
> State will discuss when the statement is true in the simultaneous entry case but not when we
allow for sequential entry, endogenous prices and product differentiation which will be discussed in
2 different models.
> Explain fixed simultaneous entry model e.g. seller deciding where to locate– minimum
differentiation occurs -> Use ‘1st Model’ -> But cut first paragraph on page and figure 1 point from it
- Hotelling's conclusion is based on the result that two firms in either product or geographic space
will locate in the middle, which is often referred to as the principle of minimum differentiation.
> Explain how simultaneous entry model may not hold in reality e.g. when sellers locate on the
beach – some assumptions we have made may not hold
> If we change some of the assumptions Hotelling makes this statement will not hold since firms will
want to locate in different locations e.g. if we consider sequential entry instead of simultaneous
entry -> Use ‘2nd Model’
- State general equilibrium conditions
- Could then relate this to supermarkets if time/spare words
> Mention statement does not hold when assumption of the prices being endogenous is made since
in reality firms can set prices
- Leads to quality of products differing -> Maximum product differentiation occurs, whereas
Hotelling found they were the same since firms locate at the same place
- Copy the point from section ‘Slide 24’ in Topic 3- Diagrams and Models document since the point
is specifically for this question
> Conclude that Hotelling’s conclusion holds under specific assumptions – arguable these do not
hold in reality
> Instead there may be conditions for which this conclusion does not hold e.g. when considering
sequential entry, endogenous prices and product differentiation.
> State any examples to support e.g. supermarkets locate if different places/ cereal producers with
product variety.
There is excessive sameness under Hotelling's assumption because the
firms locate at the same place in the middle of the market.
However, by tweaking some of his assumptions, firms will prefer to locate
in different locations. We looked at two cases. The first was the case of
sequential entry where firms spaced themselves out to strategically deter
entry. The second was introducing endogenous prices where firms spaced
themselves out to dampen price competition.
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