Hotelling's law2center of the beach.
Social optimum elsewhere
Obviously, it would be more socially beneficial if the shops separated themselves and moved to one quarter of theway along the street from each end
each would still draw half of the customers (the northern or southern half) andthe customers would enjoy a shorter travel distance. However, neither shop would be willing to do thisindependently, as it would then allow the other shop to relocate and capture more than half the market.The original model assumes that each consumer along the street will consume at least a minimum number of goodssold in the shops, and that the price of these goods are fixed by an external authority. When these assumptions arenot met, companies have incentives to differentiate their products. When not all people along the street, or along therange of possible different product positions, consume a minimum number of goods, companies can position theirproducts to sections where consumers exist to maximize profit; this will often mean that companies will positionthemselves in different sections of the street, occupying niche markets. When prices are not fixed, companies canmodify their prices to compete for customers; in those cases it is in the company's best interest to differentiatethemselves as far away from each other as possible so they face less competition from each other.
The street is a metaphor for product differentiation; in the specific case of a street, the stores differentiate themselvesfrom each other by location. The example can be generalized to all other types of horizontal product differentiationin almost any product characteristic, such as sweetness, colour, or size. The above case where the two stores are sideby 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, and results in less variety for the consumer.Businesses in fact follow both product differentiation and Hotelling's law, as contrary as they may seem. Take forexample JetBlue. The low cost airline markets itself as a revolutionary type of airline
cheaper airfare, nicer planes,better locations. As JetBlue tries to differentiate its product from its competitors, it also adopts similar flightschedules and similar service.An extension of the principle into other environments of rational choice such as election "markets" can explain thecommon complaint that, for instance, the presidential candidates of the two American political parties are"practically the same". Once each candidate is confirmed during primaries, they are usually established within theirown partisan camps. The remaining undecided electorate resides in the middle of the political spectrum, and there isa tendency for the candidates to "rush for the middle" in order to appeal to this crucial bloc. Like the paradigmaticexample, the assumption is that people will choose the least distant option, (in this case, the distance is ideological)and that the most votes can be had by being directly in the center.
Hotelling, Harold (1929), "Stability in Competition" (http:/
Hotelling- Stability in Competition.
57, doi:10.2307/2224214,"On Hotelling's 'Stability in Competition'" by Aspremont, Gabszewicz, and Thisse (http:/