

Why Ice Cream Sellers Stand Next to Each Other Instead of Spreading Out - lionhearted
http://www.sjsu.edu/faculty/watkins/downs.htm

======
joez
Three men went off on a sailboat together, a physicist, a chemist, and an
economist. Unfortunately they ran into a storm and the boat was wrecked on an
uninhabited island. The only food they were able to rescue from the wreckage
was a case of baked beans. As they got hungry, they began to wrestle with the
problem of how to open the bean cans. The physicist said "I'll climb a tree
and throw a can onto a rock and it'll split open." The others didn't much like
this idea because they thought the beans would just splatter everywhere. The
chemist said "We can soak the cans in salt water and they'll rust through."
The others didn't much like this idea because it would take too long. Then the
economist said "Hay--no problem, we'll just assume a can opener."

Economics should always be applied to real life with many caveats. It's been a
while since I took my semesters of game theory but here's some brief problems
with real life applications.

One dangerous assumption in the hoteling model is that there are no costs to
changing your position. That is, the two parties will keep relocating until
they're at the Nash equilibrium (neither party can benefit from relocating).
This is just plain wrong in real life. Political candidates lose a lot of
credibility when they reverse stances on something. It is true that after
primaries, candidates then to become more moderate but most other applications
of hoteling are dangerous. (Edit: same goes for changing marketing stances,
product positioning, pricing... etc.)

Removing relocation/repositioning costs illuminates another unrealistic
assumption: there are only two players. If you have huge costs to relocating
then you don't want to allow a competitor to come in and take your half of the
market because he positioned himself right next to you (i.e. M, N, O). If you
add in these two assumptions, players might actually want to have an agreement
to separate such that any new entrant would not be able to gain as much profit
as they are currently making (while still each controlling 1/2, (i.e. at .33
and .66 on the spectrum or something).

A third assumption is that it is a one dimensional world or that consumers
judge choices only along one spectrum. If you add in that another competitors
could compete not just on the "beach"... Or if a competitor could
differentiate itself on a topic that consumers care about more (not all
spectrums made equal)... Or spectrums change, the median consumer could shift
from one year to another.

I could go on but the point is to not assume the can opener. In
entrepreneurial terms, maybe all the competitors out there are "hoteling,"
could that be justification to be different? Purple Cow? Or maybe it is better
to make a few consumers love you than many to just like you.

~~~
andylei
>> One dangerous assumption in the hoteling model is that there are no costs
to changing your position

location cost is not really necessary. think of this as a game that the ice
cream sellers play before they locate. they figure, where do i place my hut to
get the most business? it's at the center, no matter how many operators there
are.

>> another unrealistic assumption: there are only two players

doesn't matter how many players there are. suppose there's one ice cream guy.
where is he going to put his ice cream hut? in the center. let's say another
one shows up. where is he going to put his hut? in the center. the logic
repeats.

>> A third assumption is that it is a one dimensional world or that consumers
judge choices only along one spectrum

yeah, this is a model for a perfectly competitive market. ice cream is a good
example, as well as gas stations. this model is probably bad for products with
lots of differentiation.

~~~
euccastro
>>> doesn't matter how many players there are. suppose there's one ice cream
guy. where is he going to put his ice cream hut? in the center. let's say
another one shows up. where is he going to put his hut? in the center. the
logic repeats.

No it doesn't. With three sellers in the center, the one in the middle is
close to very little people. He's in the worst possible spot and he'd better
move anywhere else. So that's no longer a stable layout.

~~~
DougBTX
By the time you have walked half way along the beach to the icecream stalls,
the distance between them will be negligible. If I walk up to three icecream
stalls, I'll be right infront of three icecream stalls, so location won't
matter.

I'm not sure how this aspect applies to the political senario, which is the
more interesting one.

~~~
sfnhltb
In politics what it usually means that while there can be advantages for two
parties to tend towards the political centre, they always tend to keep enough
distance between themselves to be clearly differentiated. The same logic still
applies more or less - although the further towards the extremes the parties
get, the larger the gap between them will tend to have to be.

------
Asmodeus
While the walking distance is not optimal, there is an upside. The ice cream
vendors will be driven to differentiate their ice cream lines, and the beach
dwellers will be able to comparison shop without walking halfway across the
beach.

~~~
sb
Hm, while reading the article I noticed an interesting aside of this theory,
similarly to yours: Assume it is correct, then your need to compete will make
all the difference it takes: Have double the amount of helpers so as to reduce
waiting times (in the political analogy one could double the supporters to
increase "fishing" returns). Differentiating the ice cream lines is in the
same league. What this effectively means is that given an existing ecosystem
of companies, a new competitor needs to combine both: near spatial placement
within the ecosystem w.r.t. to the competitors with the advantage of having
superior products/services.

What I am asking myself how this affects the computer science industry, i.e.,
in our business spatial-nearness is not necessary and for our customers
superior technology is usually judgemental; any ideas?

~~~
raquo
If you take web business for instance, all businesses a certain person knows
about are near each other (in the address bar), so you have to actually
differentiate your product/service to sell it.

------
martian
The application to politics is especially relevant: "Anthony Downs noted that
Hoteling's model could explain political competition. ... As with the ice
cream sellers on the beach the political candidates will choose a political
position that is virtually the same as their opponent's. Furthermore the
candidates will be driven to select the political position of the median
voter."

This jives with gut intuition, that in the end the differences between
Republican/Democrat aren't really that great.

Would love to see this as an interactive applet or widget where you could
adjust the locations and quantity of sellers (or politicians).

~~~
davidw
It depends on the voting system too, though. This doesn't happen so much in
systems that are not "winner takes all". In Italy, you can happily vote for
the hammer-and-sickle communists (or the extremists on the other end) and
they'll pick up a few seats in parliament; it's not like their representatives
need to win in any one district - it's enough to get a percentage of the
national vote. This has both benefits and its own problems, as well.

~~~
Luff
But to rule the country you need half of the votes, and no matter how many
parties a country has, alliances form between them as to present themselves to
the population as a viable alternative to the parties currently in power.
People who dislike the current government do not want to throw their vote away
on parties outside those two main alternatives - changing the alliance in
power takes precedence.

We have 7 political parties represented in our parliament("riksdag"), but in
effect you can only choose between two alliances who each has joint policies.
Which have now become about the same by the process described in the article.
So the choice we have is between the guys who want to lower the tax by 1-2%,
or the ones who want to raise the tax by 1-2%. The rest of the difference is
rhetoric.

~~~
davidw
In Italy (but not just Italy), there are very real philosophical differences
between the parties in the coalitions. On one side you still have real,
unrepentant communists, on the other side, you have Alessandra Mussolini
active in politics.

What often occurs is that the big center left/right party has, say, 45%, and
needs a minor party (that polled, say, 6%) to push them over 50%. The minor
party then gets to hold the bigger party hostage: we want this, this, and this
or else there is no deal. This gives the minor party a share of power all out
of proportion to their actual percentage of the vote.

------
nailer
Many browsers and OS combinators suffer problems when Java applets are
automatically launched.

Please add a [JAVA] tag in future.

~~~
lionhearted
Huh, you're right, there is Java in there - I had no idea, it looked like
simple image files. Couple questions for more savvy people -

1\. Why would the author do that for static images?

2\. Is there any way I can see that going forwards to warn people? I'm running
Chrome/Win7, and didn't even notice.

I looked up the source and there it is -

<P><CENTER> <APPLET CODE=hoteling1 HEIGHT=100 WIDTH=400></APPLET>

</CENTER>

But it really makes no sense why the author would do that - it's just a
straightforward, somewhat boring image. Thoughts?

~~~
nfriedly
Perhaps it was an attempt to stop people from "stealing" his images.. or
perhaps the author just doesn't know any better...

~~~
by
We should probably apply Hanlon's razor "Never attribute to malice that which
can be adequately explained by stupidity." and assume he doesn't understand
progressive enhancement

<http://en.wikipedia.org/wiki/Progressive_Enhancement>

------
jlees
There's some discussion of this in _Starbucked_ , i.e. why Starbucks stores
open across the road from each other. Part of it is if people are already
going to that location for coffee, having an extra Starbucks and shorter lines
will incite them to go more often; the illusion of choice. I don't really
recall the rest of the reasoning as it seemed somewhat spurious, but the fact
quoted in the book, that when a Starbucks opens across from another they
_both_ do better business than the solo shop, is quite remarkable.

------
RyanMcGreal
Downs has done some remarkable work in systems theory. He famously observed
that the equilibrium between motorists and transit users (and between peak and
off-peak drivers) adjusts when you add lane capacity. The Downs-Thomson
Paradox states that adding more peak driving capacity draws a corresponding
number of people out of transit and into personal vehicles, causing overall
traffic to remain the same or worsen.

------
matt1
Related question: why do big hardware stores, like Home Depot and Lowes,
always seem to be next to each other? Same with Walmart, Target, and KMart.
Same with gas stations.

It seems like it'd be better to space them out, especially if you're the
inferior business. They can't just get up and move like the ice cream
scenario. Why do they do it that way?

~~~
davidw
Well - there are also things like zoning laws that come into play in that
case.

------
pavel_lishin
But what happens when there are three ice-cream sellers?

~~~
lacker
There's no stable equilibrium. The ones on the edges are constantly
incentivized to move towards the center, but at some point the guy in the
middle is better off moving anywhere else. Kind of like the "divide the
dollar" game.

~~~
pbhjpbhj
I doubt that position is important if the 3 are directly adjacent one another,
or at least not as important as say the appearance of your store front or your
prices or your quality or your reputation or your display of well known logos
....

If I walk all the way down the beach 3m further to get to a nicer looking
icecream shop is nothing. Indeed I think I'd look at the price of the
icecreams first, then the ones people are leaving with and make a cost
analysis, then probably choose the one selling pistachio flavoured icecream.

~~~
eru
3 miles or 3 meter?

~~~
pbhjpbhj
There should probably have been some punctuation: if I walk down the [whole
length of the] beach, 3m is not much further.

Metres, not "mi" miles.

~~~
eru
Thanks. I am not too familiar with the non-SI systems.

------
randomwalker
In the pg essay "It's Charisma, Stupid"
<http://www.paulgraham.com/charisma.html> he says _Opinions seem to be divided
about the charisma theory. Some say it's impossible, others say it's obvious._

I was in the "it's obvious" camp, but I had a sense of deja vu as I was
reading the essay. I have the vague feeling that I found it obvious not
because I had figured out on my own, but because I'd read about it elsewhere.

This article brought it back to me. Back when I was in high school, some
popular math book that I read (don't remember which one) had this as an
example of how simple mathematical reasoning can explain questions of great
social importance. I remember being impressed.

The other half of it is that many commentators* have noticed that charisma is
an important factor in presidential elections, even if they didn't say it was
the _only_ one. So I guess at some point I'd put two and two together in my
brain, which was why everything in the pg essay looked familiar.

Anyway, that was a long-winded way of saying "thank you for posting this!" :-)

*Scott Adams is one. I recommend reading his blog if you don't already; guised as humor you will regularly find deep wisdom.

------
TrevorJ
There is a game theory course on itunes U that covers this more in depth
during one of the first lectures - worth taking a look at if anyone is
interested in delving deeper into this sort of thing.

~~~
zacechola
One of these? <http://www.academicearth.org/lectures/search/game%20theory/>

~~~
TrevorJ
Ah, yes! that's the course, thank you!

------
messel
If your competition is selling ice cream, current market pressure forces you
to innovate in a way that allows you to stand out.

Therefore having balloons or a fireworks show may attract people to your
stand. Carry "healthy" only 8 brand frozen yogurt.

You need to create a market black hole that sucks people's attention to your
product and it's gotta be a rich enough experience to keep their attention,
for as long as you can.

Dense neutron star hot fudge should help pull folks in.

------
RyanMcGreal
Summary: position is, er, a positional good.

<http://en.wikipedia.org/wiki/Positional_good>

------
axod
Our local town has about 6 Mobile phone shops all in a row, in the same street
- something that's quite common to towns.

I guess the other point is that it encourages customers to shop around. If
they can see 6 shops in a row, they'll likely go into a few of them and see if
they're getting the deal they want.

If those 6 shops were all over town, each one would get far less custom, since
a visitor would likely only go in one of them.

~~~
olliesaunders
They'd get fewer customers through their doors but not necessarily less
customers buying.

~~~
axod
Sure, so I guess there's 2 alternatives:

1\. Be all over the town, and rely on marketing to get people to come to
_your_ shop and not the others.

2\. Be all in the same street, get more walk in customers, and rely on good
salespeople and good deals to get the sales.

I'm guessing that they've found 2 to work better than 1. Also means they can
take advantage of each others marketing.

Also I expect once a street becomes 'known' for something, it'd be silly to
set up a shop anywhere else for that thing. For example Tottenham Court Road
is where you go for Computing/tech shops in London, so that's where most
people go if they want tech.

~~~
stcredzero
Does this explain the disproportionate prestige of .com?

~~~
lionhearted
> Does this explain the disproportionate prestige of .com?

It's part of it. Here's a few other reasons:

1\. It's a quality indicator: It means it's more likely that the company has
been around a long time and that it's not a scam.

2\. People's default surfing habits had them looking for the .com. I had a
.net domain for a company I ran and we bought the .com for $3000 after a
number of clients told us they forgot our site, and worse - sent emails to the
.com address that we never got.

3\. This is a more recent development, but with the iPhone having a ".com"
button on the keyboard, that makes it even more advantageous going forwards.

------
hegemonicon
I wonder if it's related to the following phenomena:

An antique seller has a a shop downtown. A second antique shop next door, and
his business drops. Then a third antique shop opens across the street, the
neighboorhood becomes 'the antique district', and business booms for all
three.

~~~
inerte
No. Two different conclusions. The only similarity is that at some point there
were two vendors.

------
cote
Otherwise known as The Price is Right Asshole Bidding Theory: the same bid
plus one.

~~~
eru
Care to elaborate?

~~~
endtime
In TPIR, people have to try and guess the price of an item, and whoever comes
closest _without going over_ wins. So if I bid after another player, I can bid
one dollar more than him, effectively stealing his bid (unless he happened to
guess exactly right). People do this quite frequently; it's not uncommon to
see the fourth and final bidder bid one dollar higher than the highest of the
three other bids.

~~~
sfnhltb
Of course this works at the top and bottom - so you should also bid one dollar
lower than the lowest if you think it is lower than everyone thought. This is
all only true if you are bidding last, any time before that you should be
honest* to give the later players the toughest choice of going higher or lower
than you.

If you go last and think it is between two other bids you chose 1 higher than
the lower bid (because of the too high bids being ignored).

*I think in fact because of the high bids rule there is always an incentive to shave your bid to err on the low side, but it is difficult to quantify what size this effect is.

~~~
endtime
Actually, if you think everyone's bid was too high, you bid $1, since the goal
is to get as close as possible without going over. Like blackjack.

