April 5, 2016
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.
J.E.L classification codes: C72, D72, L13, R30
Keywords:Hotelling location model, Principle of Minimum Differentiation, Nash equilibrium, Best-response dynamics, Stochastic stability, Invariant measures