Since Kreps and Scheinkman’s seminal article (1983) a large number of papers have analyzed capacity constraints’ potential to relax price competition. However, the majority of the ensuing literature has assumed that products are either perfect or very close substitutes. Therefore very little is known about the interaction between capacity constraints and local monopoly power. The aim of the present paper is to shed light on this question using a standard Hotelling setup. The high level of product differentiation results in a variety of equilibrium firm behavior and it generates at least one pure-strategy equilibrium for any capacity level.