Abtract: The paper analyzes the dynamic of Hotelling’s classical model of spatial competition. Previous research has shown that the price-setting subgame only has an equilibrium in pure strategies if the firms are located sufficiently far away from each other. Hence, the equilibrium proposed in Hotelling (1929) is not stable if the firms also compete in price. The contribution of the paper is to analyze the dynamic of the price cutting process that takes place if the firms are located sufficiently close to each other. To do this, the paper analyzes the sequential adjustment process where the firms take turns to adjust to each other’s previous price and location. The existence of a stable limit cycle is shown where the two firms oscillate between two locations in a closed orbit.
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