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To 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

To 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 ago
My 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 ago
  We 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.
MrTonyD 11y ago
I've seen both good and bad societal outcomes from low barriers to entry. Similarly, I've seen both good and bad societal outcomes from unregulated free markets. I would argue that there is a distribution of outcomes as well as a distribution of "degrees" of free market possible in real-world markets. To me, it makes far more sense to look at the outcomes desired by our society and create policy to "force" those outcomes - regardless of the degree of philosophical advocacy for or against "low barriers to entry" or "unregulated free markets". It just makes more sense to focus on the desired outcomes for our society.
p4wnc6 11y ago
I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. Their relative position wouldn't improve unless many, many entrants just kept repeating the exact same formula, which is highly speculative because the market could become saturated long before a chain of entrants is built up to such a degree as to effect the people in the tails in any meaningful way It's also worth mentioning that in most real life scenarios, the risk of a cabal is incredibly high. Without regulation, what stops the first two market participants from using wealth created during their duopoly phase to "buy out" the third entrant, and then all three buy out the fourth, and so on? Each new entrant would have to value the discounted future stream of returns from their market share at something higher than the buyout, which again is really speculative. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? I'm just saying I don't think for a second that any quick and simple "but low barriers to market entry would solve this" thinking is even slightly convincing here. The Hotelling problem does really present a significant problem to natural equilibria that free markets arrive at, at least from a social welfare optimization point of view. It doesn't mean any given proposed regulation is the "right" answer, but it also doesn't do anything to build assurance that less regulation is acceptable either.
- cperciva 11y ago
  I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. You're missing my point. A rational duopoly which is concerned about the possibility of a third competitor entering the market will avoid satisfying Hotelling's law. It isn't the third competitor entering the market which improves things; it's the threat of a third competitor entering the market. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? That's a political problem, not an economic one. ;-)
  - 11y ago

deleted 11y ago

[deleted]

AJ007 11y ago

My 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 ago
We 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.

MrTonyD 11y ago

I've seen both good and bad societal outcomes from low barriers to entry. Similarly, I've seen both good and bad societal outcomes from unregulated free markets. I would argue that there is a distribution of outcomes as well as a distribution of "degrees" of free market possible in real-world markets. To me, it makes far more sense to look at the outcomes desired by our society and create policy to "force" those outcomes - regardless of the degree of philosophical advocacy for or against "low barriers to entry" or "unregulated free markets". It just makes more sense to focus on the desired outcomes for our society.

p4wnc6 11y ago

I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. Their relative position wouldn't improve unless many, many entrants just kept repeating the exact same formula, which is highly speculative because the market could become saturated long before a chain of entrants is built up to such a degree as to effect the people in the tails in any meaningful way It's also worth mentioning that in most real life scenarios, the risk of a cabal is incredibly high. Without regulation, what stops the first two market participants from using wealth created during their duopoly phase to "buy out" the third entrant, and then all three buy out the fourth, and so on? Each new entrant would have to value the discounted future stream of returns from their market share at something higher than the buyout, which again is really speculative. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? I'm just saying I don't think for a second that any quick and simple "but low barriers to market entry would solve this" thinking is even slightly convincing here. The Hotelling problem does really present a significant problem to natural equilibria that free markets arrive at, at least from a social welfare optimization point of view. It doesn't mean any given proposed regulation is the "right" answer, but it also doesn't do anything to build assurance that less regulation is acceptable either.

cperciva 11y ago
I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. You're missing my point. A rational duopoly which is concerned about the possibility of a third competitor entering the market will avoid satisfying Hotelling's law. It isn't the third competitor entering the market which improves things; it's the threat of a third competitor entering the market. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? That's a political problem, not an economic one. ;-)
- 11y ago