Hotelling's law is an observation in
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
that in many markets it is
rational
Rationality is the quality of being guided by or based on reasons. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an abi ...
for producers to make their products as similar as possible. This is also referred to as the principle of minimum differentiation as well as Hotelling's
linear city model. The observation was made by
Harold Hotelling
Harold Hotelling (; September 29, 1895 – December 26, 1973) was an American mathematical statistician and an influential economic theorist, known for Hotelling's law, Hotelling's lemma, and Hotelling's rule in economics, as well as Hotelling's ...
(1895–1973) in the article "Stability in Competition" in ''Economic Journal'' in 1929.
The opposing phenomenon is
product differentiation
In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from co ...
, 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 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
Market share is the percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a ...
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
In welfare economics, a social welfare function is a function that ranks social states (alternative complete descriptions of the society) as less desirable, more desirable, or indifferent for every possible pair of social states. Inputs of the f ...
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
discretionary income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major ...
), companies can position their products to sections where consumers exist to maximize profit; this will often mean that companies will position themselves in different sections of the street, occupying niche markets. When prices are not fixed, companies can modify their prices to compete for customers; in those cases it is in the company's best interest to differentiate themselves as far away from each other as possible so they face less competition from each other.
Political Science
Especially true in the American two-party system, political parties want to maximize vote allocated to their candidate. Political parties will adjust their platform to comply with the median voters' demand. 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.
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
commodities
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a co ...
, and results in less variety for the consumer.
An extension of the principle into other environments of
rational choice
Rational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postula ...
such as election "markets" can explain the common complaint that, for instance, the presidential candidates of the two largest
American political parties are "practically the same". The candidates elected during
primaries
Primary elections, or direct primary are a voting process by which voters can indicate their preference for their party's candidate, or a candidate in general, in an upcoming general election, local election, or by-election. Depending on the c ...
are usually established figures within their own partisan camps. Electors in the middle of the
political spectrum
A political spectrum is a system to characterize and classify different political positions in relation to one another. These positions sit upon one or more geometric axes that represent independent political dimensions. The expressions politi ...
are more likely to be
swing voter
A swing vote is a vote that is seen as potentially going to any of a number of candidates in an election, or, in a two-party system, may go to either of the two dominant political parties. Such votes are usually sought after in election campaign ...
s, and there is a tendency for the candidates to "rush for the middle" to appeal to this crucial bloc. The assumption is that people will choose the candidate with a closer
ideology
An ideology is a set of beliefs or philosophies attributed to a person or group of persons, especially those held for reasons that are not purely epistemic, in which "practical elements are as prominent as theoretical ones." Formerly applied pri ...
to their own, so that the most votes can be had by being directly in the center.
In real life
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:
*
McDonald's
McDonald's Corporation is an American multinational fast food chain, founded in 1940 as a restaurant operated by Richard and Maurice McDonald, in San Bernardino, California, United States. They rechristened their business as a hambur ...
and
Burger King
Burger King (BK) is an American-based multinational chain of hamburger fast food restaurants. Headquartered in Miami-Dade County, Florida, the company was founded in 1953 as Insta-Burger King, a Jacksonville, Florida–based restaurant ch ...
*
McDonald's
McDonald's Corporation is an American multinational fast food chain, founded in 1940 as a restaurant operated by Richard and Maurice McDonald, in San Bernardino, California, United States. They rechristened their business as a hambur ...
and
Jollibee
Jollibee is a Filipino chain of fast food restaurants owned by Jollibee Foods Corporation (JFC). As of December 2021, JFC had a total of about 1,500 Jollibee outlets worldwide, with restaurants in Southeast Asia, the Middle East, East Asia ...
in the Philippines
*
Alfamart
PT Sumber Alfaria Trijaya Tbk or Alfamart is a primarily-franchised Indonesian convenience store chain. As of May 2021, it had over 17,000 stores spread across Indonesia, 4 million daily customers and tens of thousands of micro, small and medium ...
and
Indomaret
PT Indomarco Prismatama or Indomaret (short for Indonesia Market Retail) is a chain of retail convenience stores from Indonesia, with over 18,000 stores across Indonesia. It is the first and largest chain of this kind of store in Indonesia. Indom ...
in Indonesia
*
Target
Target may refer to:
Physical items
* Shooting target, used in marksmanship training and various shooting sports
** Bullseye (target), the goal one for which one aims in many of these sports
** Aiming point, in field artillery, fi ...
and
Walmart
Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United States, headquarter ...
*
Lowe's
Lowe's Companies, Inc. (), often shortened to Lowe's, is an American retail company specializing in home improvement. Headquartered in Mooresville, North Carolina, the company operates a chain of retail stores in the United States and Canada. A ...
and
Home Depot
The Home Depot, Inc., is an American multinational home improvement retail corporation that sells tools, construction products, appliances, and services, including fuel and transportation rentals. Home Depot is the largest home improvement re ...
*
CVS and
Walgreens
Walgreen Company, d/b/a Walgreens, is an American company that operates the second-largest pharmacy store chain in the United States behind CVS Health. It specializes in filling prescriptions, health and wellness products, health information, a ...
Nation's biggest pharmacies sidle right up to each other
/ref>
* Whole Foods
Whole Foods Market IP, Inc., a subsidiary of Amazon, is an upscale American multinational supermarket chain headquartered in Austin, Texas, which sells products free from hydrogenated fats and artificial colors, flavors, and preservatives. A US ...
and Trader Joe's
Trader Joe's is an American chain of grocery stores headquartered in Monrovia, California. The chain has over 569 stores across the United States.
The first Trader Joe's store was opened in 1967 by founder Joe Coulombe in Pasadena, Californi ...
See also
* Location model
* Braess's paradox
Braess's paradox is the observation that adding one or more roads to a road network can slow down overall traffic flow through it. The paradox was discovered by the German mathematician Dietrich Braess in 1968.
The paradox may have analogies in ...
* Nash equilibrium
In game theory, the Nash equilibrium, named after the mathematician John Nash, is the most common way to define the solution of a non-cooperative game involving two or more players. In a Nash equilibrium, each player is assumed to know the equili ...
*Median voter theorem The median voter theorem is a proposition relating to ranked preference voting put forward by Duncan Black in 1948.Duncan Black, "On the Rationale of Group Decision-making" (1948). It states that if voters and policies are distributed along a one- ...
* Commoditization
In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consum ...
* Central place theory
Central place theory is an urban geographical theory that seeks to explain the number, size and range of market services in a commercial system or human settlements in a residential system.Goodall, B. (1987) The Penguin Dictionary of Human Ge ...
References
{{Reflist
Economics laws
1929 in economics