has been more useful in explaining certain political We can conclude by saying that in this model the key factor for product differentiation is location. Each player is a hot dog stand that competes for customers on a beach. As d'Aspremontet al.have shown, with quadratic consumer transportation cost the two sellers will seek to move as far away from each other as possible.We show that the location game possesses an infinity of mixed strategy Nash equilibria. assumption. It also examines the extent to which the principle of minimum differentiation has stood the test of time and assesses both Hotelling's contribution to retail location theory … consequence for presidential candidates, who must "sell" on On one hand, there is an incentive for both stands to locate at the centre of the beach in order to increase their market share by reaching out to the greatest amount of customers, in what is known as the demand effect. the most votes will win, and a candidate must locate nearer unwilling to reposition himself. Theory developed by economist Harold Hotelling that suggests competitors, in trying to maximize sales, will seek to constrain each other's territory as much as possible which will therefore lead them to locate adjacent to one another in the middle of their collective customer base. location decisions were not economically efficient. political candidates along the political spectrum trying to [more] This model has a high degree of generality and can be … concerning location and product characteristics, the model With Hotelling’s Law can be illustrated with an example. Hotelling's Theory defines the price at which the owner or a non-renewable resource will extract it and sell it, rather than leave it and wait. Hotelling Model Graphically 0 1 1 Location of firm A Location of firm B Mass of consumers = 1 1 0 0 ∫1 1 0 1dz z= = − = x Industrial Organization-Matilde Machado The Hotelling Model 4 4.2. location decisions that are economically efficient. Also assume For this reason, we must assume that both ice cream stands offer the exact same ice creams, and therefore consumers’ utility will be given only by the price of the ice cream and the distance to the stand. Harold Hotelling was an accomplished economist. According to the hotelling theory, the most profitable extraction is one in which the price of the resource, determined by the marginal net revenue from sale of the resource, increases at the rate of interest. A and C in the illustration below. sound quite different before nominations are decided. attract votes from voters. This second condition implies that both stands can’t be located at the same point exactly in the middle of the beach. These must "sell" to the same beach. Both lost in landslides. In this first model, is the exact middle of that beach, so consumers to its left would go to stand A while consumers to its right would go to stand B. (This is the median voter theorem.) 1 Given locations (a;1 b), solve for location of consumer who is just indi erent b/t the two stores. will also sell to those people between him and Henry who are Despite differences in prices, the stand with the lowest prices will not necessary attract all the demand since consumers will also consider the distance to the stand. In order to set their business in the best location to maximize profits, the firms will have to evaluate three key variables: competitors’ location, customers’ distribution and transportation costs. from the 1000-foot mark to the middle at 2000 feet, and Two conditions are necessary for profits to be positive and maximized in both stands: -Selling prices must be higher than marginal costs. When two firms selling a homogeneous product with constant marginal cost of production are situated along a linear market, the firms will locate as close to each other as * … In this paper we consider a Hotelling model on the linear city, where the location is not a free good. increasing traveling costs, it seems that we can have In this case, the model has two stages. The point of division between the areas served by these two stands is determined by the condition that at a certain point it is indifferent for consumers between consuming in one stand or the other. Because the 1500-foot mark. Equating and equalising we get. Hotelling theory is named for Harold Hotelling (1895–1973). Furthermore, it would not be much harder to extend the theory to the third dimension as well if we used a planar space instead of a line. If customer will buy only from the closest vendor. Total cost for consumers depends both on the price of the goods and the distance to its location (t). Stage 2: having already determined a location the stands will now have to set the price that will report the highest possible profits. 1972, George McGovern won the Democratic nomination standing to move to the middle. well to the left of the average voter, and was unable or Assuming all consumers are identical (except for location) and consumers are evenly dispersed along the line, both the firms and consumer respond to changes in demand and the economic environment. google_color_border = "808080"; Internal vs. external returns 7. And, on the other hand, there is an incentive for both stands to locate at opposite extremes in what is considered to be the strategic effect. 2000-foot mark, George will get all the customers up to the Keywords: agglomeration, linear city, location, principle of minimum differentiation According to Hotelling’s Law, there is an ‘undue tendency for competitors to imitate each other in quality of goods, in location, and in other essential ways’ (Hotelling, 1929: 41). might not care whether they go to the nearest vendor. While the first effect will reduce differentiation between the stands, the second one will increase it. This will lead us once again to the static model result, in which each stand sets its own price. they are greaterso that when the vendor gets far Papers of the Regional Science Association 43 , 23 - … If traveling costs are less, then people are independent of where the vendors locate. google_color_bg = "FFFFCC"; ex: Two ice-cream vendors moving … ADVERTISEMENTS: Definition: Professor Sargent has followed the inductive method in formulating his theory of location. By assume that the beach is short enough so that total sales However, this model includes two different approaches, the first one being a static model consisting of a single stage were firms choose their location and prices simultaneously, and a dynamic model in which price is set after determining the location. In showing this, Hotelling made use of invariance, thereby anticipating a theory developed … located at even intervals along this beach, and that a Yet similar cereals are viewed by consumers as good substitutes, and the standard model of this kind of situation is the Hotelling model. If George moved from point A to point //-->. unable or unwilling to reposition himself in the center. For small-business owners, understanding the connection between place and success can help guide you in researching and choosing the right place to start your business. Here is a really well produced and clear visual explanation of the Hotelling model of spatial location.