Abstract. We study a linear location model (Hotelling, 1929) in which n (with n ≥ 2) boundedly rational players follow (noisy) myopic best-reply behavior. We show through numerical and mathematical analysis that such players spend almost all the time clustered together near the center, re-establishing Hotelling's "Principle of Minimum Differentiation" that had been discredited by equilibrium analyses. Thus, our analysis of the best-response dynamics shows that when considering e.g. market dynamics as well as their policy and welfare implications, it may be important to look beyond equilibrium analyses.

J.E.L. classification codes. C72, D72, L13, R30

Keywords. Hotelling location model, Principle of Minimum Differentiation, Nash equilibrium, Best-response dynamics, Stochastic stability, Invariant measures