PRODUCT SELECTION BY QUANTITY-SETTING FIRMS

Hotelling suggested that competition between oligopolistic sellers wou ld result in consumers with inelastic demands being offered products w ith an excessive sameness. Smithies extended the Hotelling result to t he case of elastic demand. While these results are intuitively appeali ng, it has subsequently been shown that both the two-stage and simulta neous price-location games suffer from fundamental nonexistence proble ms when firms do not price discriminate. In this paper we investigate the Smithies analysis assuming that firms compete in quantities rather than prices. We show that a tendency to agglomeration is characterist ic of quantity-location competition. But when locations and quantities are chosen simultaneously, problems of non-existence of equilibrium d o not arise and the principle of minimum differentiation does not hold . By contrast when firms play a two-stage game, choosing locations in the first stage and quantities in the second stage, the nonexistence p roblems that characterize price-location games (whether simultaneous o r two-stage) extend to the two-stage quantity-location game for certai n parameter values.