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Hotelling's law
- deleted 11y ago[deleted]
- benmarks 11y ago> This is clearly a non-optimal solution for consumers. Pretty sure that needs qualification or at least a citation. "Non-optimal" sounds suspiciously subjective.
- sokoloff 11y agoIf you think of the distance any individual consumer needs to travel as a penalty/loss to that consumer, locating both shops right next to each other at the center clearly does not minimize the sum penalty to the set of consumers. Moving each shop 1% of the distance away from the center will reduce by that amount the distance travelled by nearly every consumer. (Only those consumers located at or between the shops will be harmed, and everyone else will gain. As you continue to move the shops apart, this set becomes larger until you reach an equilibrium.)
- benmarks 11y ago> If you think of the distance any individual consumer needs to travel as a penalty/loss to that consumer... I wouldn't consider "distance" a penalty in most cases; again, our respective opinions here seem just that.
- devenson 11y agoThis is better explained as a Nash equilibrium. The example of shops on the street encourages similarly located shops only when there are two shops. If there are three or more shops each shop owner no longer wants to locate their shop in the center of the street. Instead, the final result is unstable (no Nash equilibrium). so the keep jockeying for the best location, thus speading out.
- wyager 11y agoFree markets are stochastic Nash-equilibrium-seeking optimization processes. By which metric do they "not work"? It's not as if governments are any better at reaching Pareto optima.
- personjerry 11y agoCould an argument be made that a government could [at least attempt to] enforce some socially more optimal solution?
- msellout 11y agoGeographic regulation is unnecessary, but the government may decide it is responsible for lowering barriers to entry -- supporting a healthy financial market and streamlined licensing/inspection. Competitors entering the market will destabilize the two-firm Hotelling equilibrium.
- cperciva 11y agoTo the contrary, this is a great example of how regulated markets with high barriers to entry can have adverse consequences, and why we need free markets. In a free market, Hotelling's law does not hold because a third competitor can enter the market, position themselves slightly to one side of the duopoly, and claim almost half of the market. In order to prevent this, the incumbents will avoid placing themselves right next to each other -- and in fact, acting to minimize the threat posed by new market entrants produces the solution which is optimal for customers. The situation described by Hotelling's law only arises in a market where the duopoly can be confident of remaining a duopoly. EDIT: The deleted comment was arguing that Hotelling's law illustrates a failure mode of the free market and a consequential need for regulations to further the public good.
- deleted 11y ago[deleted]
- AJ007 11y agoMy theory was that in order to get a bank loan one must demonstrate an existing proven business model and the math behind it. This means things get copied past the point they don't work anymore.
- slavik81 11y agoWe had someone from a local bank come in to our High School "Career and Life Management" class. Half the class was assigned a script and had to go looking for loans. The other half was given fake money to open a bank and give out loans. My group struggled to attract people while paying out reasonable interest rates. All the other banks were giving better offers. To actually make a deal, we ended up having to accept uncomfortably risky sounding customers at razor-thin margins. When the time came, we looked on the back of the customer cards and discovered that thankfully they were not all as risky as we feared. We rolled the dice, but unfortunately rolled poorly and had a partial default by one of our borrowers. We were a little unlucky. Without that default we'd have turned a profit, and most groups didn't have a single default. In the end, we suffered a moderate net loss. However, not a single group made a profit. All our competitors were giving out loans at a loss after accounting for inflation. The lesson was supposed to be about banking and interest. Instead, it was a lesson on business. I'd never realised quite how destructive idiots with money could be.
- devonkim 11y agoI'm familiar with a busy intersection that has two Starbucks across from each other and after some investigation I found that they both served different markets - one for morning commuters (opened early, closed earlier) and the other for afternoon commuters with evening meetings (opened later, closed later). Traffic was so high if you tried to cross to the other side's Starbucks that everyone suffered. So even though it seems wasteful to have redundant use of resources, this is a form of load balancing (perhaps closer to sharing) in the real world that addresses one of the major difficulties of services being adequate distribution of it rather than the supply. The reduced hours for employees at each location are another matter but given the actual demand was about right for a fully staffed single Starbucks it doesn't mean we "lost" jobs with reduced work either.
- whatshisface 11y agoWhy can't one of the pharmacies open up a second store on the other side of their competitor? Then instead of the service areas <-AB->, shop A could have <-ABA->. Presidential candidates and choices in the "I am thinking of a number between one and ten" game can't expand to second locations, but businesses can. In addition, if the pharmacy can't afford an expansion, a competitor could start up and secure n-1 of B's traffic by being slightly rightmore.
- personjerry 11y agoMoney, zoning, self-cannibalizing. It's a nice thought outside the box, but irrelevant for the metaphor.
- hammock 11y agoThen B opens another and you get ABAB. It's the same game
- rbanffy 11y agoWhen Blockbuster Vídeo entered the Brazilian market, it seemed every store was located less than one block away from the then current market leader, Hobby Video. One hypothesis was that they bought the same market/demographic data. The other is that Blockbuster never even needed that data - all they had to do was to locate their stores based on Hobby Video's use of the demographic data.
- powertower 11y agoIn the US it's the same exact story, except it's with McDonald's and Burger King.
- valarauca1 11y agoSo TL;DR Competition breeds Conformity? Isn't that just another expression of entropy?
- jamesfisher 11y agoCould you expand on this?
- valarauca1 11y agoEntropy is the idea that all information will become uniformly distributed. In a market space given enough competition all products become similar. These are statements of the same fact. Just instead of the universe we look at a market space, time becomes competition, and feature set becomes entropy count.
- jasode 11y agoThere was (2012) a widely shared 4 minute cartoon about this topic: https://www.youtube.com/watch?v=jILgxeNBK_8 https://www.youtube.com/watch?v=jILgxeNBK_8
- frik 11y agoIsn't it the same with software? Office suites, map-apps, email-apps, Android (from different vendors), etc. try to more or less mimic the most successful one.
- taurath 11y agoDoes this explain the starbucks across from the starbucks?
- alister 11y agoSimplest explanation: the first Starbucks had enough business to justify a store twice as large but didn't have room to expand. So they opened a second store across the street.
- caw 11y agoIt also has some other benefits, where you can service traffic coming from different directions. When you drive on the highway and get off on an exit to get gas, most of the time you'll stop at the one on your side of the road so it's easier to get back on the highway. You also avoid having to make traffic modifications to deal with the queue of cars trying to make a left into the Starbucks.
- chias 11y agoI imagine so. I believe most (if not all) Starbucks are franchise stores. Franchise stores -- where the products are indeed identical and not just similar -- are the perfect-case scenario for this effect.
- ryanwaggoner 11y ago
- raymondgh 11y agoIn the two shops on the street example, Hotelling's explains that while it would better serve the customers to be each located one quarter distance from each end of the street, but that neither shop would risk letting the competitor relocate to capture more of the market. Can this be expanded to mean that Hotelling's law allows for a third competitor to approach an adjacent pair and simply steal all of the business from one side of the street?
- fasteddie 11y agoHotelling's law assumes businesses are mobile, which is why its often characterized as a pushcart or ice cream truck. The business in the middle would want to move to the other side of its neighbor, and the process would repeat. As such, there's no stable equilibrium in a three-firm Hotelling's law problem.
- wrboyce 11y agoI recently started reading a book called "The Joy of Game Theory: An Introduction to Strategic Thinking" which touches on explaining the grouping of similar shops (and politicians tending towards the centre!) as an effect of Game Theory. Very interesting read so far.