On hotelling's competition with general purpose products

Abstract

This paper extends the traditional Hotelling’s model of spatial competition by allowing firms to choose the degree of general purposeness of their products before they compete in prices. The degree of general purposeness is approximated by endogenizing the per–unit transportation cost coefficients. The game presents a continuum of perfect Nash equilibria featuring no price competition. In equilibrium, firms behave as ‘specialist’ by choosing high transportation cost coefficients. This allows them to extract all the marginal consumer’s rent and to perfectly segment the market. Moreover, market is entirely served by both firms regardless the value of the consumer’s reservation price.