In his famous 1929 article on duopoly in space, Hotelling [15] explained why two competing duopolists would locate together in the center of the market rather than adopting the socially optimal, transport minimizing locations. Local clustering of firms is a matter of common observation in many markets, and it is part of the conventional wisdom of economists to refer to Hotelling and to the socially wasteful nature of clustering whenever local clusters are encountered in the real world. Boulding has contributed to this conventional wisdom by laying sweeping claims for the applicability of Hotelling's model. After explaining the workings of the model he goes on to observe: This is a principle of the utmost generality. It explains why all the dime stores are usually clustered together, often next door to each other; why certain towns attract large numbers of firms of one kind; why an industry, such as the garment industry, will concentrate in one quarter of a city. It is a principle which can be carried over into other "differences" than spatial differences. The general rule for any new manufacturer coming into an industry is "make your product as like the existing products as you can without destroying the differences." It explains why all automobiles are so much alike and why no manufacturer dares make a car in which a tall hat can be worn comfortably. It even explains why Methodists, Baptists, and even Quakers are so much alike, and tend to get even more alike. 14, p. 484.1People who follow the conventional wisdom and accept statements such as those made by Boulding are assuming that Hotelling's model generalizes to a much wider set of market conditions than those covered explicitly by the model.The theoretical work on this subject does not, in fact, support Boulding and the conventional wisdom. Smithies [22] showed that when demand is responsive to delivered price, the tendency for Hotelling's duopolists to gravitate to the market's center is weakened. Papers by Lerner and Singer [ 161 and by Eaton and Lipsey [6] demonstrate that if the number of firms serving Hotelling's one-dimensional market were increased, firms would never be grouped in clusters larger than two firms, and that clustering is a necessary condition of equilibrium only at the peripheries of the market. A subsequent paper by Eaton and Lipsey [lo] demonstrates that when demand is responsive to delivered price, firms in the interior of a *This paper is a revised version of Eaton and Lipsey [7].
We investigate the origins of identity and the innate proclivity to draw a distinction between 'insiders' and 'outsiders'. We propose an evolutionary explanation: we argue that identity arises because it facilitates survival. In an evolutionary setting we endogenize preferences and demonstrate that the evolutionarily stable preferences fashioned by natural selection would distinguish between insiders and outsiders. We then work out the implications of such preferences in two contemporary scenarios, one entailing rent-seeking behaviour and the other involving public good provision. Our results are in conformity with empirical evidence. JEL classification: D03, D87, D72, H00
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