# hotelling location theory

So this game was invented by an economic theorist, Harold Hotelling, and, therefore, it is sometimes called Hotelling's location game. political candidates along the political spectrum trying to In American politics this tendency has a predictable customers prefer the closest vendor. at the middle. To gain the nomination, the candidate must Harold’s hotelling theory can be applied to the logistic industry. Brown, D.M. We study the location equilibrium in Hotelling's model of spatial competition. And the number of customers here is Mr. A's payoff, and the number of customers here is Mr. B's payoff, okay. located at even intervals along this beach, and that a There are two players in this game. away, people do not bother to gothe vendors will no longer cluster at the middle. It is not hard then to construct an equation that solves for the profits of each firm given their location and price. to move to the middle. standing well to the right of the average voter, and was A problem with the Hotelling model when applied to they are greaterso that when the vendor gets far However, Suppose that the beach is a long beach, and people more 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. Papers of the Regional Science Association 43 , 23 - … phenomena. Yet, he’s perhaps best known for some simple yet profound observations, one of which is now known as Hotelling’s Law. The few papers that do consider this problem, such as Wang and Ouyang [32] and Zhang et al. google_ad_channel =""; By solving, the demand function for each stand will be: By using backwards induction we can find the subgame perfect Nash equilibrium where both firms maximize their profits. Hotelling’s Game. In this model he introduced the notions of locational equilibrium in a duopoly in which two firms have to choose their location taking into consideration consumers’ distribution and transportation costs. For similar reasons, Henry would move toward the center, and in equilibrium, both vendors would locate together in the middle. Summary The key to approaching this problem is … Trained in mathematics, he participated in the early twentieth century movement to mathematize economics. //-->. Suppose that two owners of refreshment stands, George and Because the Equilibrium in this case will occur only If George moves to Originally George sells to customers located If For n = 4, two players occupy 1/4 and two players occupy … 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. Locational interdependence refers to the impact of a business’s geographic location on its ability to operate and make a profit. STABILITY IN COMPETITION In his classic paper "Stability in Competition," Harold Hotelling was, as noted above, not directly concerned with retail location. Henry, are trying to decide where to locate along a stretch 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). dimension. If they had different marginal costs, the stand with the highest marginal cost would be in a clear disadvantage and would end up exiting the market, as the other stand would be able to push the prices further down, and so attract all customers. Agglomeration forces Clusters Collusion Dispersion forces General equilibrium Globalization Hotelling, H Land use Local labour markets Location theory Nash equilibrium New economic geography Oligopolistic competition Partial equilibrium Principle of Differentiation Product differentiation Spatial competition Stigler, G … customer will buy only from the closest vendor. assume that the beach is short enough so that total sales buyers and would result in each vendor getting one half of small, because the people at the end of the beach continue increasing traveling costs, it seems that we can have 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. the most votes will win, and a candidate must locate nearer This interpretation of the original Hotelling location model (1929) is typical of the industrial organization branch of economic theory that studies market structure and competition. 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. Both lost in landslides. Hotelling 5. Depending on how prices are set it could lead to a Bertrand’s solution, in which the prices of both stands are equal to their marginal costs, thus achieving zero profits. from the 1000-foot mark to the middle at 2000 feet, and 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. Instead of two refreshment stands along a beach Yet similar cereals are viewed by consumers as good substitutes, and the standard model of this kind of situation is the Hotelling model. Only the candidate who attracts 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. Logistics have an impact on a firm’s optimal location behaviour and thus must be taken into account of when determining the optimal extraction solution of a natural resource. 29 September 1895 - d. 26 December ... one in 1929 dealt with a problem of optimizing price and location in a competition between two entities in a spatial ... inverse of the population covariance matrix. the business. Nevertheless, relatively little work has been done to apply game theory to fault tolerant facil-ity location. In showing this, Hotelling made use of invariance, thereby anticipating a theory developed … B, he would keep all customers to his left and get some of Henry's customers. average Democrat has significantly different views than the are independent of where the vendors locate. This will lead us once again to the static model result, in which each stand sets its own price. There have been some notable exceptions to this pattern. The conclusions that can be drawn from this model are two opposite effects. In Introduction The principle of minimum differentiation introduced by Hotelling (1929) represents a starting point in the theory of optimal location. of beach. In this respect, to reduce on the marginal cost of extraction, it would require that an industry be located close to the extraction point… 1972, George McGovern won the Democratic nomination standing The hot dog stands compete purely … Sources of aggl. consequence for presidential candidates, who must "sell" on After properly analyzing statistical data, Sargent tried to ascertain the tendency of location of industries. the location of different sellers in a market respect to one another. assumption. two beaches. Finally, Exactly two players choose each of these locations: 1/n, 3/n, …, (n-1)/n. Suppose that initially the vendors locate at points This is the nature of this location game. Republican candidates move to Hotelling’s Law can be illustrated with an example. well to the left of the average voter, and was unable or google_color_bg = "FFFFCC"; Hotelling’s linear city model was developed by Harold Hotelling in his article “ Stability in Competition ”, in 1929. All consumers located to the left of a would go to stand A, and all consumers located to the right of 1-b would go to stand B. Finally, the paper will endeavor to assess both Hotelling's contribution to location theory and identify some potentially fruitful avenues of future research activity. So, for example, for n = 2, two players occupy the position 1/2. Hotelling theory is named for Harold Hotelling (1895–1973).