Salop Circle Model
Updated 2026-08-09
INTRODUCTION
English translation pending.
CORE DEFINITION
Proposed by Steven Salop as an extension of Hotelling's model, the framework assumes consumers are uniformly distributed around a circle that stands for preference or geography, and each firm chooses a position and a price. Consumers buy from the nearest firm and bear a transport cost proportional to distance. Because moving away from rivals reduces direct price comparison, firms have an incentive to differentiate maximally rather than crowd the center, and the model yields equilibrium prices, firm counts and welfare levels for monopolistically competitive markets.
SCAFFOLDING EFFECT
Reduce cognitive load
- Map the circle: plot competitors on the preference or attribute space instead of a ranked list. - Find the empty arc: locate the segment of the circle farthest from existing competitors. - Compete on distance: differentiate the offering position rather than cutting the price.
Anchor fast decisions
Consumers pick the nearest firm and pay a cost that grows with distance, so a firm located far from its rivals faces nearby customers with no close alternative and can hold price above cost. Crowding a competitor's position turns the contest into a price war over the same buyers, while separation converts the transport cost into a captive local demand. The equilibrium number of firms follows from the trade between variety gains and fixed entry costs.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Hotelling%27s_lawverified
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