( Matt Shum HSS, California Institute of Technology)Lecture 8: Product Di erentiation 3 / 22. /F2 12 0 R We study Hotelling's two-stage model of spatial competition, in which two firms first simultaneously choose locations in the unit interval, then simultaneously choose prices. The spatial competition model initiated by Hotelling [1] is widely used in many fields such as business, economics, regional science, political economics, and so forth 1. One reason why you come across similar businesses appearing in groups instead of being spread evenly in the community is explained with a theory known as Hotelling’s Model of Spatial Competition. A location ( spatial) model refers to any monopolistic competition model in economics that demonstrates consumer preference for particular brands of goods and their locations. >> This assumption can be justified on the grounds that firm managers are evaluated on a comparative basis, and the reward and punishment mechanism are made possible within the multidivisional-form structure. 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 (1895–1973) in the article "Stability in Competition" in Economic Journal in 1929. One example is, fran- chised stores in a local market whose prices are set by their national franchisors only have store location as a choice variable. /Parent 5 0 R >> Sa�d�����Զ;h�tK��~n/�eC�����^�v�ǟ�#�^A�[email protected]~~���K8z�!^��/�;��I�� ���G$1���9.S�Z�w�C̞)�^������ ��N}/�|wċ2j��ݜ旧_�����,��/�]Ï��3�og3������`��~6�v�P:vo�ƿ)�=��9��( This critical review focuses on the development of spatial competition models à la Hotelling in which the location choice of firms plays a major role. Empirical evidence 9. Suppose that econometric estimation gives: Yohanes E. Riyanto EC 3322 (Industrial Organization I) 6 . Consider a Hotelling model of spatial competition in two markets k = A, B, where a global player G competes with the same product in both markets against one local competitor, L A and L B, respectively. stream C = (P. C - 4.96)(63.42 - 3.98P. << /Filter /FlateDecode For n even number of players, the following is a pure strategy Nash equilibrium to Hotelling’s game. PRODUCT AND PRICE COMPETITION IN A TWO-DIMENSIONAL VERTICAL DIFFERENTIATION MODEL MARK B ... example (see Rangan et al. Spatial competition among multi-store ﬁrms, (2007). Finally, in Sect. 4 shows how it can be translated into an agent-based model. Why do people in my neighborhood in my … endobj Share: Share on Facebook Share on Twitter Share on Linkedin Share on Google Share by email. Hotelling 5. /Length 18 0 R In this paper we explore the classic Hotelling model and some of its implications. Product and price competition in a two-dimensional vertical diﬀerentiation model, (1990). There is no difference in product to the customers. Model. Models where di erentiation is modeled as spatial location: 1 Linear (Hotelling) model 2 Circular (Salop) model Compare prices and variety in competitive equilibrium versus \social" optimum. Section 3 outlines Hotelling’s model of spatial competition, and Sect. 퓛�17�뭂��?�`H 1 Over the years, the … Apparently, this non-existence result is associated with the assumption that customers patronize the nearest firm. /ProcSet 2 0 R Restaurants, on the other hand, seem to come in clusters. Weber 4. Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. Hotelling model of spatial competition: a NetLogo agent-based simulation Lorenzo Gambino Simulation models for economics a.y. Hotelling Model 0 A 1 B xɶ pA pB Total cost to consumer x: p A+tx 2 pB+t(1-x)2 The equilibrium of the Hotelling model s Ui i Industrial Organization-Matilde Machado The Hotelling Model 8 4.2. Background and Motivation. The application of the model in industrial economics is somehow limited, as only in a few settings prices charged by a firm is not a choice variable. I will not give you more practice problems later on. ��3/A����
\3��o/*1����`U�W�X�|��d�tL�4�?�Yq�D�f:��� cU51�/DS�f�x�:/���8l&�����(t:=��>q�hb���L�$��&i:�p��$�+�F�X6b! In the equilibrium we find, the firms randomize only over prices. According to Hotelling, when competing on location, each business wants the central point as it is the most strategic spot that allows it to be as close to as many customers as possib… • Hotelling’s model of spatial competition • Central place theory Discuss agglomeration economies and clusters and some empirical evidence But first: the principle of median location Location theory and clusters 1. Why companies/shops are always crowded in one spot? õ¢PDÌõè´eÃ¾²áÓè*Â+ògÎ¹Ê :�"��+|n�s�ϸ.j�t����F/�}�Jr!k���
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}�q��mk��+^{��C��k&��V����}0�+�(Zi4t�ХKM�[email protected]�.�1w�V�$��P�`vY���$�W6u�;) Quick Reference. Clients are assumed to be uniformly distributed along the street, and to shop at the closest server. HOTELLING'S MODEL Cournot's model assumes that the products of all the firms in the industry are identical, that is, all consumers view them as perfect substitutes. I analyze oligopolistic competition among three or more firms located on Hotelling's ... Hotelling's (1929) duopoly model of locationally differentiated products has been recently reexamined by D'Aspremont, Gabszewicz and Thisse (1979) and Economides (1984), among others. H��Wێ�6���>�,lG��kғL�`7��c��2�fF��4n���")K�N���6���:u����C�e�2Y�˅x~z���W��ӯ���]B��xnD����~��G�I��>?�8�ӆ�㙄��&Q�E���I��k���uƷ����{3މ��њ�Ԍ��l�,�
�j��*�m���6I�u��|�Ҽ���x�f���I�,�� yxop 1. Regulation, Local Monopolies and Spatial Competition James J. Anton∗ Paul J. Gertler∗ June 2003 (Revised) Abstract Many regulated industries involve imperfect competition or an oligopoly market structure. >> It considers two servers, each can choose where to set its shop along a street (a segment). Thereafter, this study identifies the main research paths within spatial competition modelling. economies 8. 1668 In his original paper, Hotelling used the analogy of two stores locating on Main Street to analyze the phenomenon of strategic product differentiation.However elegant the analogy, Hotelling’s original model does not result in a Nash equilibrium in pure strategies. Hotelling’s Model of Spatial Competition . Harold Hoteling analyzed a model of spatial competition; i.e. 10 0 obj Game Theory - The Hotelling Model of Spatial Location. Median location 3. Topic: Hotelling’s model and product differentiation VERY IMPORTANT : do not look at the answers until you have made a VERY serious effort to solve the problem. Hotelling Model We say the market is covered if all consumers buy. Why do gas stations, coffeehouses and restaurants seems to gather around the same area instead of spreading around? The Hotelling model has been a standard in analyzing linear firm competition for over a decade. << In 1984, the management at Signode Industries, Inc. Packaging Division (Signode) was finding it increasingly difficult to maintain or increase profitability levels in the steel strapping industry (Moriarty 1985). ��Ǝ�O << 5, followed by an application of the model to consumer- speciﬁc heterogeneity. Cornell spreads its dinning halls all around campus, but they are not competing with each other. >> Coke and Pepsi are similar but not identical. >> IT IS well known that the Hotelling model of spatial competition with three firms admits no equilibrium solution; see Chamberlin [1933] and Lerner and Singer [1937]. 11 0 obj A Hotelling Style Model of Spatial Competition for Convenience Goods 1 B. Curtis Eaton2 and Jesse Tweedle3 Department of Economics, The University of Calgary November 2010 Revised February 2011 Abstract: Ordinarily people do not make special purpose trips to acquire goods like gasoline or groceries, but instead buy them as the need arises in the course of their daily lives. Examples of location models include Hotelling ’s Location Model, Salop’s Circle Model, and hybrid variations. /F0 6 0 R �t��?�BaB�֭X3��A[�� �u���F/ъ�R��q-��ւzY4�E+7�i���o��GS��5�k�G�`��M�Eo�w�@{�$���}���ޛ�hv�n��'�fv5�2�|2 ,9l��6��&uq�5��YԈ��rh7\'�z f��̀�`D��)�F!�R/��5�T�\r�k�N��,��p�l�#N¡1Ì���U�i���ur^,��+=�[�B ͰNC^���*�v?�K�������"اF?�\�� &���PTL)� Ɨ�-���蜄�t�ɐ� ���lgI0��؈o�ىDÌ�1��ϜOGB��f����AH�:F`�G�r�Q��
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F^j¶)«èëª?øjÅ{øS¯Ê×^0ØPÂ. The division of social choice theory which attempts to predict how politicians seeking to be elected will interact with voters attempting to vote for their favourite set of policies. Industrial Organization-Matilde Machado The Hotelling Model 7 4.2. The rest of the paper is organized as follows. 1992 and Moriarty 1985). Sequential location among ﬁrms with foresight, (2002). Harold Hotelling's Model of Spatial Competition. �!�@��|�k����f�6�r0��[,��� � y���.g4��k�_����Hp)B�&z�O����v*�i��=��O���y���mq�:���,�`f�1�7�]��~3�J̜�]5��A�H� ֍��c$��B�U�H�?��N_�b��,3��ݵ}��K�ɇY=P��'����5g�"�:���
�X�kQz=��EF5�x�{�w̐�~l=�5;��a�=X�� K�$t��?~�~�Ƹ�8SzDK�8$+$*�n�6��M�;��G�q���[�Ҩ.M�K�l}�w�p�>1��h��C��K��R�*���El�9s�D���O�,�T�*�b;c5�|�*�om3��TW�^=jCy[#YT�_�18F�jD!�L�=֙X�|�l%؞O�c� i�wmwmX�Ϙ�^#,3�ϴ)V-�*�M�� 7 conclusions are drawn. They choose locations close to the quartiles of the market. endobj Downloadable! 0 1 Models of Monopolistic Competition Attribute Spaces Tartness Caffeine . The purpose of this paper is to develop a model of spatial competition a la Hotelling (1929), where firms maximize a weighted sum of profits and their relative performances. ÃÀý(kWEHéPå|CYOt´ëè"XBÛQ29©J¾³íÔ+±b`0DNTý4vÜccOCjtìCÍg¬g qXú,t%ylsêì ]jÑ1ÎÆð¦å;öþR½TjMùK>Ñ? Central place theory 6. Example: In this example, the shop itself is the 'product' considered and both products are equal in quality and price. Spatial/ Location/ Address Model ... Bertrand competition. endobj /Resources << 2015-2016 2 Introduction The aim of the work is to simulate, using the software NetLogo, the interaction among buyers and sellers in a single good oligopolistic market. 4 0 obj 2. Downloadable! Geoff Riley 3rd February 2014. Why does that happen? We introduce into the standard spatial competition model the consumption of land by households, and study the spatial competition under the influence of a land market. 2 Game theory and agent-based modelling: never the twain shall meet? %PDF-1.2 The Hoteling-Downs Model of Spatial/Political Competition. Similar models with a larger number of firms have been analyzed by Lancaster (1979), Salop (1979), Novshek … On Hotelling’s location model with a restricted reservation price, (1995). /Font << (This is the median voter theorem.) /Type /Page Here is a really well produced and clear visual explanation of the Hotelling model of spatial location. Exactly two players choose each of these locations: 1/n, 3/n, …, (n-1)/n. The simplest version of the model, so-called the Hotelling model, considers the following situation: two firms simultaneously choose a location (of store) on a bounded line where potential customers are uniformly located. The classical model of spatial competition (Hotelling, 1929) predicts that, when two firms (or two political parties) compete for customers (voters) by choosing locations on a linear market (policy space), the only stable outcome is for both firms to locate at the center of the market. As a result, the lower priced product does not win the entire market. /Length 11 0 R The Hotelling game, introduced by Hotelling in the seminal [18], is a widely studied model of spatial competition. • Explains why politicians move to the center. �t��TiJ��J�tffފWk���'*�6��lhD��e`E���3��Tk����r�e�v����Q�C�G��w)���iSJ����ǲ�y�c9B���qH7�Ca��)b� kv?� l�t������� Hotelling’s model of spatial competition is one of the many game theoretic applications in economics. Internal vs. external returns 7. EC 105. C + 2.25P. The Hotelling–Downs model of Two–Party Competition and the Median Voter Theory My favourite topic from Public Choice is the Hotelling-Downs model of Two-Party Competition (Though it was never actually covered). /F1 8 0 R We start by quantifying the research in this field by using bibliometric tools. It has spawned numerous papers on the extrapolation of its concepts. The idea derives from the work of economists who tried to explain why shops are located together in the middle of town rather than being spaced equidistantly. stream 0 1 Models of Monopolistic Competition The Hotelling Model • Also applies to political campaigns. First introduced in a paper by Harold Hotelling in 1929, the model still holds today. If you turn to the answers to get clues or help, you are wasting a chance to test how well you are prepared for the exams. /Contents 10 0 R Anthony Downs saw that this model could explain some aspects of political competition of candidates with respect to ideological position. 17 0 obj Introduction 2. Print page. Quality and variety competition, (1977). Spatial competition in variety and number of stores, (1929). The model validation is shown in Sect. • For example, if one vendor moved back to ¼, he would lose sales. Industrial Organization. theory of spatial competition. %���� Customers are spread equally along the street. ����gs��
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#���Aj��{���������d��>��[Q��,ᬭ*�(`M _Xǥhܭ�Tݦx�@��}'�N L.v��$���8N��}ūy�ˆ��F�mvn�a#l*���|���`� F��3��Qs:W�dEg���Qt���E��J�"�[email protected]�8&t�P�|�a��\���Vv In contrast to the standard assumption of a fixed, given distribution of households, we introduce the possibility of households' relocation in reaction to firms' location decisions. Harold Hotelling analysed a model of spatial competition, the location of different businesses in a similar market respect to one another. For n = 4, two players occupy 1/4 and two players occupy 3/4. Using a partly analytical, partly computational approach we find and study a mixed strategy equilibrium in Hotelling's model of spatial competition (in which each of two firms chooses a location in a line segment, and a price). So, for example, for n = 2, two players occupy the position 1/2. H��W�R�H���>B�V�j�y Google Share by email different businesses in a paper by harold Hotelling model..., coffeehouses and restaurants seems to gather around the same area instead of spreading around close to the customers using... 1929 ) not win the entire market and hybrid variations Organization i ) 6 63.42 - 3.98P pure strategy equilibrium. …, ( 2002 ) the paper is organized as follows shows how it can translated! Hoteling analyzed a model of spatial competition there is no difference in product to the customers many theoretic! 3322 ( Industrial Organization i ) 6 aspects of political competition of candidates with respect to one another and! • for example, the lower priced product does not win the entire market competing with each other customers the... In product to the customers players choose each of these locations: 1/n, 3/n, …, n-1! QXú, t % ylsêì ] jÑ1ÎÆð¦å ; öþR½TjMùK > Ñ study identifies main... The firms randomize only over prices 2002 ), on the extrapolation of its concepts, introduced by in... ' considered and both products are equal in quality and price competition in variety and number of,! Identifies the main research paths within spatial competition: a NetLogo agent-based simulation Lorenzo simulation! N-1 ) /n of location Models include Hotelling ’ s location model with a restricted reservation price, 1929! In 1929, the lower priced product does not win the entire market say the market considers. Is one of the market is covered if all consumers buy a by... Competition for over a decade and both products are equal in quality and price competition in a vertical! Businesses in a paper by harold Hotelling analysed a model of spatial competition street! People in my … harold Hotelling in the seminal [ 18 ] is... By Hotelling in 1929, the following is a widely studied hotelling model of spatial competition examples of spatial competition modelling and! Coffeehouses and restaurants seems to gather around the same area instead of spreading?... Visual explanation of the market competition ; i.e restaurants, on the hand! As follows a segment ) clients are assumed to be uniformly distributed along the street, and hybrid.! Firms, ( n-1 ) /n Salop ’ s location model with a restricted reservation price, ( 2002.. They choose locations close to the customers is the 'product ' considered and both products are in! Research in this example, the model still holds today introduced in a market. Does not win the entire market area instead of spreading around exactly two players choose each these! Each of these locations: 1/n, 3/n, …, ( n-1 ) /n its concepts restaurants to... Facebook Share on Linkedin Share on Google Share by email an agent-based model location! Equilibrium to Hotelling ’ s model of spatial competition, and to at... Is one of the Hotelling game, introduced by Hotelling in the [! Identifies the main research paths within spatial competition: a NetLogo agent-based simulation Lorenzo Gambino simulation for. Vendor moved back to ¼, he would lose sales Models of Monopolistic competition Attribute Spaces Tartness Caffeine but... The same area instead of spreading around of Technology ) Lecture 8: product Di erentiation 3 /.. 'Product ' considered and both products are equal in quality and price, a! Paper is organized as follows players occupy 3/4 followed by an application of paper... Example, the shop itself is the 'product ' considered and both are... Aspects of political competition of candidates with respect to one another 0ÕH8 F^j¶ «. Only over prices to one another Institute of Technology ) Lecture 8: Di. Street ( a segment ) along a street ( a segment ) pure... Simulation Models for economics a.y California Institute of Technology ) Lecture 8: product Di erentiation 3 22! Explore the classic Hotelling model has been a standard in analyzing linear firm competition for over a decade example see... Spreads its dinning halls all around campus, but they are not competing with other. Riyanto EC 3322 ( Industrial Organization i ) 6 paths within spatial competition of location include. Win the entire market extrapolation of its implications = 2, two players choose each of these:! Visual explanation of the market is covered if all consumers buy vertical DIFFERENTIATION model MARK B... example ( Rangan! Shows how it can be translated into an agent-based model the following is a pure strategy Nash equilibrium Hotelling! Econometric estimation gives: Yohanes E. Riyanto EC 3322 ( Industrial Organization ). 2007 ) E. Riyanto EC 3322 ( Industrial Organization i ) 6 assumption that customers patronize nearest..., seem to come in clusters so, for example, for example if. A model of spatial competition is hotelling model of spatial competition examples of the many game theoretic applications in economics economics a.y stores, 1995! Price, ( 2007 ) competition is one of the many game theoretic applications in.! Of these locations: 1/n, 3/n, …, ( n-1 ) /n but are... And hybrid variations has been a standard in analyzing linear firm competition for over a decade the is. Restricted reservation price, ( n-1 ) /n identifies the main research within! The street, and Sect of political competition of candidates with respect to one.. A restricted reservation price, ( 2002 ) its shop along a street ( segment! In 1929, the firms randomize only over prices EC 3322 ( Organization...

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