Published Oct 25, 2023 Hotelling’s Theory, also known as Hotelling’s Law, is an economic theory that explains how firms in a competitive market choose their locations and prices. The theory is based on the assumption that firms aim to maximize their profits by strategically positioning themselves in a way that attracts the most customers. Hotelling’s Theory is often applied to analyze industries where location plays a crucial role, such as retail outlets or restaurants. To understand Hotelling’s Theory, let’s consider the example of two competing burger joints located along a beach promenade. Both restaurants independently aim to maximize their profits, which are directly influenced by the number of customers they attract. If both restaurants were to locate themselves at the center of the promenade, customers would be evenly spread between the two. However, one restaurant could gain a competitive advantage by moving closer to either end of the promenade. By doing so, it attracts more customers who are closer to that specific end. This creates a situation where both restaurants gradually move towards opposite ends of the promenade, effectively minimizing their competition and maximizing their customer base. The key idea behind Hotelling’s Theory is that in a market with homogeneous products, firms will strategically position themselves close to their competitors to secure a larger customer base. This positioning allows firms to differentiate themselves based on convenience rather than product variation or quality. Hotelling’s Theory provides insights into how firms strategically choose their locations in competitive markets. By understanding this theory, businesses can make more informed decisions about where to locate based on their target customers and the positioning of their competitors. Additionally, policymakers can use this theory to analyze market competition and the potential impact of new entrants on existing businesses.Definition of Hotelling’s Theory
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Why Hotelling’s Theory Matters
Economics