Image differentiation and locational proximity among retail firms

Hotelling's (1929) classic paper gave rise to a voluminous literature and founded a controversy concerning the validity of the Principle of Minimum Differentiation (PMD). This research has produced conflicting theoretical results and inconsistencies between theory and empirical observations of retail competition. This paper develops a theory of market behavior that encompasses the extent and direction of customer loyalties, the multiplicity of chains and stores, and three forms of competitive expectations. Under conditions of shared competitive expectations, competitive pessimism, and competitive optimism, it provides a theoretical test of PMD and an explanation for the prevalence of spatial proximity and the differentiation of images in retail competition.