Hotelling's law
This article relies largely or entirely on a single source. (July 2011) |
Hotelling's law is an observation in
The opposing phenomenon is product differentiation, which is usually considered to be a business advantage if executed properly.
Example
Suppose there are two competing shops located along the length of a street diverse running north and south, with customers spread equally along the street. Both shop owners want their shops to be where they will get most market share of customers. If both shops sell the same range of goods at the same prices then the locations of the shops are themselves the 'products'. Each customer will always choose the nearer shop as it is disadvantageous to travel to the farther.
One shop
For a single shop, the optimal location is anywhere along the length of the street. The shop owner is completely indifferent about the location of the shop since it will draw all customers to it, by default. However, from the point of view of a social welfare function that tries to minimize the distance that people need to travel, the optimal point is halfway along the length of the street.
Two shops: halfway
Hotelling's law predicts that a street with two shops will also find both shops right next to each other at the same halfway point. Each shop will serve half the market; one will draw customers from the north, the other all customers from the south.
Another example of the law in action is that of two takeaway food pushcarts, one at each end of a beach. If there is an equal distribution of rational consumers along the beach, each pushcart will get half the customers, divided by an invisible line equidistant from the carts. But, each pushcart owner will be tempted to push his cart slightly towards the other, moving the invisible line so that the owner is on the side with more than half the beach. Eventually, the pushcart operators will end up next to each other in the center of the beach.
Social optimum
It would be more socially beneficial if the shops separated themselves and moved to one quarter of the way along the street from each end — each would still draw half the customers but customers would, on average, make a shorter journey. However, neither shop would be willing to do this independently, as it would then allow the other to relocate and capture more than half the market.
Deviating assumptions
When people along the street, or along the range of possible different product positions, consume more than a minimum number of goods (i.e. have
Political science
In a democracy, and especially in the American two-party system, political parties want to maximize the vote share allocated to their candidate. In theory, this means that political parties will adjust their platform to comply with the median voters' preferences. The Comparative Midpoints Model represents this idea best: Both political parties will get as close as possible to the competing party's platform while preserving its own identity.[3] However, party primaries can complicate this dynamic and make the stable points harder to find.[4]
Application
The street is a metaphor for product differentiation; in the specific case of a street, the stores differentiate themselves from each other by location. The example can be generalized to all other types of horizontal product differentiation in almost any product characteristic, such as sweetness, colour, or size. The above case where the two stores are side by side would translate into products that are identical to each other. This phenomenon is present in many markets, particularly in those considered to be primarily
An extension of the principle into other environments of
In real life
The examples and perspective in this section may not represent a worldwide view of the subject. (December 2018) |
This phenomenon can be observed in real life, not just in commodity businesses like bars, restaurants, and gas stations, but even in large, branded chains:[5]
- McDonald's and Burger King[6]
- McDonald's and Jollibee in the Philippines
- Alfamart and Indomaret in Indonesia
- Target and Walmart
- Lowe's and Home Depot
- CVS and Walgreens[7]
- Whole Foods and Trader Joe's
See also
- Location model
- Braess's paradox
- Nash equilibrium
- Median voter theorem
- Commoditization
- Central place theory
References
- JSTOR 2224214, archived from the original(PDF) on 2016-02-21, retrieved 2014-10-20
- JSTOR 1911955.
- JSTOR 40326400.
- ISSN 2523-5699. Retrieved 2023-06-05.
- ^ Why Do Certain Retail Stores Cluster Together?
- ^ Why are McDonald's and Burger King usually located near each other? Fast food location game theory
- ^ Nation's biggest pharmacies sidle right up to each other