He observed that consumers prefer the nearest of two options when purchasing fixed.In this model, it has been recognised that the differentiation in the product Y is based upon quality. (1979)), that each consumer is characterized by a location x in the segment 0,1 measuring his relative taste for the two products.Harold Hotelling formulated this principle to explain spatial competition. 17 (1999) 557 574 products are located at the extremes of the segment 0,1 and, following Hotelling’s classical model (Hotelling (1929) and d’Aspremont et al.

At higher levels of income, consumers would buy more quantity of the superior and lesser of the inferior product. In each time period, every consumer purchases one or both products. According to considerations about interdependence mentioned above the competition between firms is described by Out of them, Y 2 is supposed to be the superior variety.

The input of capital required to produce one unit of any variety of product Y is µ. Let us suppose, the production of one unit of any variety of product Y requires the use of one unit of labour. This could be because a larger quantity of resources is being extracted in each period or due to moreFor producing a superior variety of product Y, a firm must make use of more capital per unit of labour. Suppose that the marginal extraction cost is slowly rising over time. Exogenous Extraction Costs Extraction costs per se do not change the fundamental logic of the above model. Variations on the Basic Hotelling Model 3.1.

Thus H-O theory can explain the intra-industry trade between the different countries. The labour-abundant country B will export both the labour-intensive good and the lower quality varieties of the capital-intensive good.Instances of such trade can be found in some parts of the clothing industry, where capital-abundant countries tend to export superior quality products to the labour-abundant countries, while importing lower quality products from them. This country will, therefore, export superior varieties of the capital-intensive product. At the same time, however, it.If the unit cost of producing the product of quality n is lower in country A than in country B, i.e., C A(µ) C A(µ)], because W B < W A.Thus country A, which is capital-abundant and in which capital is relatively cheap, will have a comparative advantage in producing those varieties of the product Y in case of which quality is superior to the marginal quality. In other words, n represents the index of quality.The traditional Hotelling effect operates by lowering the in situ value of the resource stock, and thereby encouraging depletion.

This will be done because production cost is identical for it in case of all the varieties and it can dispose of the same quantity of the new variety as it had been doing in the case of the earlier variety.Since each firm will produce only one variety, it implies that each variety will be turned out in only one of the two countries. In the conditions of free trade, absence of transport costs and other barriers to trade, trade will take place between these two countries in the given differentiated product.A firm in one country that was producing earlier a variety identical to one produced in the other country, will switch over to variety of product that is not being produced by any other firm. The horizontal differentiation of goods is supposed to occur when the product varieties differ in their characteristics, which may either be actual or perceived.It is now supposed that there is another country which is identical to the first country is every respect. These models recognise that there is horizontal differentiation of goods.

Norman observed that the welfare-augmenting intra-industry trade can exist even in the identical economies having horizontal product differentiation and falling average cost of production.In the category of Neo-Chamberlinian models, we briefly consider another model discussed by A.J. This model, no doubt, leads to the inference that one half of the range of product varieties will be produced by each country, yet it is unable to tell which varieties will be produced by each country.On the basis of the analysis made in Krugman model, A.K. Thus, the intra-industry trade assumes welfare gain for both the countries.The intra-industry trade model given by Krugman is indeterminate in one sense. Although there is same volume of total consumption, yet all the consumers will gain from trade due to the use of a wider variety of goods, there being no loss on production side and real wage remaining exactly equal in the two countries.

First, the number of varieties will increase in the capital- abundant country and their number will shrink in the labour-abundant country. In this model, it is assumed that the initial factor proportions in the two countries are different and that the firms entering the sector producing differentiated products have to incur substantial initial capital outlay.Lawrence and Spiller, in this model, gave two major conclusions. It extends the basic model to include two factors of production that are employed to turn out a labour-intensive identical product and a capital-intensive horizontally differentiated product. This model discusses the possibility of multiple equilibria including also a situation in which one country specialises in the production of homogeneous good, while the other country specialises in the production of differentiated good.Another model in this context is one suggested by C.

Neo Hotelling Models :The structure of models referred as Neo- Hotelling models rests upon the approach suggested by K.J. In fact, as new varieties are introduced, some older varieties will disappear altogether from the markets of the two countries. Falvey.The Neo-Chamberlinian models, mentioned above are restricted on account of their unrealistic and faulty assumptions.The main weaknesses in these models are as under:(i) The form of utility function taken in Krugman model discounts the possibility that consumers follow same scale of preferences related to the product varieties.(ii) It is clearly unrealistic to suppose that the product varieties are completely independent of demand.(iii) When the firms switch from one variety to another, some adjustment costs have to be incurred but these models ignore such costs.(iv) Apart from the adjustments costs, the change in product variety may involve some other costs, which again have not been recognised in these models.(v) These models assume that the opening of trade will not result in the disappearance of any variety. These conclusions have much similarity with the conclusions given by the basic H-O model and the model given by R.E.

Each variety, in the case of differentiated product, will be produced by only one firm of only one of the countries and varieties are spaced evenly along the spectrum. The only difference is that there is a lack of movement of factors of production between them. In other words, there will be the same equilibrium position in both the countries.If the free trade opens, it amounts to the creation of one country, which is twice the size of either of the two original countries because they are identical. There will also be the same agricultural production, prices and incomes. Lancaster terms this situation as ‘prefect monopolistic competition’.In the absence of trade, the two countries will produce same varieties in the same quantities. Each variety will be produced in equal quantity and will be sold at the same price such that each firm will be obtaining only normal profits.

Hotelling Model Definition