Hotelling’s Location Game

This game that tests your strategic instincts and market savvy! You and your competitor are rival ice cream vendors, each hoping to dominate a sunny beach packed with thirsty customers.

Your mission: position your cart perfectly to capture the most customers. Should you stake out territory at the bustling center, crowding your rival but guaranteeing foot traffic, or find a quiet stretch of sand to avoid direct competition?

Think carefully—the beach is buzzing, and every footstep matters!

Ready to scoop up victory? Strategize, stake your claim, and dominate the sands!

Hotelling's Location Game: Spatial Competition by Bruce Cole

Concept:

The Hotelling game explores how businesses position themselves relative to competitors and customers. It's often explained with vendors locating carts on a beach.

Core Idea:

• Vendors strategically select locations to capture the largest market share.

• Customers choose the nearest vendor, aiming to minimize their walking distance.

• The game often demonstrates why competing businesses cluster together rather than spreading evenly apart.

Rules and Gameplay:

1. Setup:

   • Imagine a long, straight beach where customers are uniformly distributed along its length.

   • There are typically two ice cream carts (vendors), each selling identical products at identical prices.

2. Vendor Decisions:

   • Both vendors simultaneously choose a spot along the beach to set up their cart.

   • Once set, they cannot move for the rest of the day.

3. Customer Behavior:

   • Customers choose the nearest cart to minimize walking distance.

   • Vendors aim to maximize the number of customers who choose their cart.

4. Payoff:

   • The vendor who captures the larger share of customers earns more profits.

   • If vendors pick identical locations, they split the market evenly.

Insights (Equilibrium Outcome):

• "Principle of Minimum Differentiation":
  Vendors often choose locations near the middle of the beach, close to each other, capturing half the market each. This equilibrium occurs because:

  • A vendor located away from the center would yield market advantage to their rival, who could then dominate more territory.

  • Rational strategies drive both to settle close together, even though spreading out might seem socially optimal to reduce customer travel distance.

Real-world Applications:

• Businesses clustering in shopping centers.

• Gas stations and coffee shops located directly opposite each other.

• Political parties shifting their platforms towards the center to appeal to the majority of voters.