A key idea of the linear model is that a consumer loses value proportional to the "distance" from her best quality (her location, ) to the quality of the product that she buys. An important feature of this model is that any consumer needs only one unit of product. ![]() Products are in a sense substitutes and produced with zero marginal costs, so the producers are interested in charging higher prices.Īn arbitrary consumer has her value (reservation price) that she is ready to pay for a unit of product. The difference in quality characterizes "product differentiation". Each of two firms may choose its position of product with a certain quality ( and, respectively). ![]() In a linear Hotelling model for product differentiation, consumers are supposed to locate uniformly within the quality continuum.
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