The Principle of Minimum Differentiation Revisited: Cournot versus Bertrand

Abstract

Hotelling was the first to suggest that the competition between oligopolistic sellers would result in consumers being offered products with an excessive sameness. In this chapter we extend his analysis to a case in which demand is elastic and firms compete in quantities. We find that firms are indeed encouraged to adopt excessively agglomerated locations (in some welfare sense). We also find, perhaps contrary to intuition, that some of the non-existence problems that are endemic to cases in which firms choose prices and locations also extend to cases in which they choose quantities and locations. The desire to control the market centre — the principle of minimum differentiation — is self-defeating. This appears to be primarily a result of denying firm the power to price discriminate between consumer locations. Where equilibria can be identified, we show that quantity competition leads to greater product concentration, lower output, higher profits and lower consumer welfare than does price competition.