Stability in Competition? Hotelling in Continuous Time

We study Hotelling’s classic duopoly location model in continuous time with flow payoffs accumulated over time and the price dimension made explicit. In an experimental setting, subjects chose price and location in treatments varying only by the speed of adjustment. We find that the principle of minimum differentiation generally holds, with little distance between subjects’ location decisions. Price decisions, however, tend to be volatile, which is arguably consistent with theory. Our data also support recent literature that the ability to respond quickly increases cooperation. JEL: C72, C92, D21, D43

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