Managerial Economics: Question 4

Hotelling Framework

Market Share Effect

I would like to demonstrate the Hotelling Framework (Market Share Effect) with the help of a map of
my bachelor’s university.

From the above photo, one can notice a lot of restaurants and cafes are closely located to each
other. The pin in the photo shows the end of the university campus road. 95% of students are
inevitably required to pass through this road to reach their homes.

The shop owners would want their shops to be where they will get the most market share of
customers. Ideally, in this case, the students would not prefer to walk long distances to fulfill their
hunger. For example, during the lunch break hours, hundreds of students would be leaving campus
to have lunch. They would want to get back to university asap. Therefore, the optimal location for
firms would be as close to the university. The firms focus on customer preferences, which in this
case are distance & convenience. The firms here also keep their prices similar & economically
suitable for students.

Restaurants, Cafes, Xerox shops, and Stationaries all fall under the “Market Share Effect,”

Price Competition Effect

In a price competition effect, the firms strategize on prices to enjoy different market power. The
firms have control over the market. In such instances, the price competition effect drives
competitors apart from each other.

For example, Rewe & Aldi have a quite significant price difference in their products. Especially,
vegetables, fruits, eggs, & meat. These products are a person’s daily requirements.

Rewe: This firm enjoys the market share, who prefers distance convenience over prices.

Aldi: This firm enjoys the market share, who prefers prices over distance convenience.

Both the firms cannot be located too close to each other & hence they are located far away. This is
an explicit example of the price competition effect where it drives competitors apart from each
other.