Location models as models of product choice (Q1065695)

Markets in which firm choice of product is an economic decision are commonly analyzed using a variant of the location model pioneered by Hotelling. This paper develops a framework for formalizing the idea that a set of consumers with preferences defined over an abstract set of commodities can be represented as if they behaved as is typically assumed in the goods-as-locations models. With this framework in place, we are able to derive the preference and technology assumptions underlying the two most common versions of these models, the line segment and circular models. This framework also makes it possible to determine the foundations of the now well-known Principle of Minimum Differentiation.