Stationary and nonstationary strategies in Hotelling's model of spatial competition with repeated pricing decisions

Abstract.

This paper examines Hotelling's model of location with linear transportation cost. Existence of pure strategy subgame perfect equilibria in the infinitely repeated price game with fixed locations is proved. These subgame perfect equilibria have a stick and carrot structure. Given firm locations, there are discount factors sufficiently high that there is a subgame perfect equilibrium with a two-phase structure. Given the discount factors, there are stationary subgame perfect equilibria for a wide range of locations. However, for some pairs of location, no symmetric simple penal code exists, all subgame perfect profiles are nonstationary, and there is only one seller in the market in infinitely many periods.