Legacy Of Hotelling
Questions regarding the paper ‘Retail location theory: The legacy of Harold Hotelling’
H1) Can you describe the PMD including its relationship with Hotelling’s model?
The principle of minimum differentiation comes down to the fact that retail firms want to make/sell their products as similar as possible in order to get the best return. Hotelling developed a model that is in line with the principle of minimum differentiation. The model can be seen as a location model and explains consumer preference for particular products and their locations, taking account of two aspects: location and pricing. Other aspects such as conjectural variations, market shape, consumer behavior and transportation costs are not taken into account. By using the principle of minimum differentiation and the location model, Hotelling wanted to show that price stability was possible within a duopoly without conspiracy (Brown, 1989). H2) Discuss weaknesses of Hotelling’s model.
After the publication of Hotelling’s paper (‘Stability in Competition’), a lot of research has been done into the principle of minimum differentiation (Brown, 1989). Some new findings came forward out of this research that criticizes Hoteling’s conceptualization and model. What researchers mostly criticize is the generalization of Hotelling’s model. Researchers have examined the universality of the model and the degree of success varied. Researchers also disagree with the fact that Hotelling assumes zero conjectural variation, since this rarely occurs in reality. Next to that, they do not agree with Hotelling’s conception about the location of economic activities in space. There can be said that the fact that Hotelling makes some wrong key assumptions based on the principle of minimum differentiation, leads to weakness of the model. Another aspect that makes Hotelling’s concept weak is that it fails to recognize the existence of clustering economies, his concept/model sees clustering as a negative thing.
H1) Can you describe the PMD including its relationship with Hotelling’s model?
The principle of minimum differentiation comes down to the fact that retail firms want to make/sell their products as similar as possible in order to get the best return. Hotelling developed a model that is in line with the principle of minimum differentiation. The model can be seen as a location model and explains consumer preference for particular products and their locations, taking account of two aspects: location and pricing. Other aspects such as conjectural variations, market shape, consumer behavior and transportation costs are not taken into account. By using the principle of minimum differentiation and the location model, Hotelling wanted to show that price stability was possible within a duopoly without conspiracy (Brown, 1989). H2) Discuss weaknesses of Hotelling’s model.
After the publication of Hotelling’s paper (‘Stability in Competition’), a lot of research has been done into the principle of minimum differentiation (Brown, 1989). Some new findings came forward out of this research that criticizes Hoteling’s conceptualization and model. What researchers mostly criticize is the generalization of Hotelling’s model. Researchers have examined the universality of the model and the degree of success varied. Researchers also disagree with the fact that Hotelling assumes zero conjectural variation, since this rarely occurs in reality. Next to that, they do not agree with Hotelling’s conception about the location of economic activities in space. There can be said that the fact that Hotelling makes some wrong key assumptions based on the principle of minimum differentiation, leads to weakness of the model. Another aspect that makes Hotelling’s concept weak is that it fails to recognize the existence of clustering economies, his concept/model sees clustering as a negative thing.
References: Brown, S. (1989). Retail Location Theory: The Legacy of Harold Hotelling. Journal of Retailing, 65(4), 450-470. Eaton, B.C. (1979). Comparison Shopping and the Clustering of Homogeneous Firms. Journal of Regional Science, 19(4), 421-435. Economides, N. (1984). The Principle of Minimum Differentiation Revisited. European Economic Review, 24 (3), 345-368.