The Principle of Minimum Differentiation Revisited: Return of the Median Voter

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Working paper
Nobuyuki Hanaki, Emily Tanimura, Nicolaas J. Vriend
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Documents de travail du Centre d'Economie de la Sorbonne
Centre d'Economie de la Sorbonne
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.
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