
Hotelling’s Game, or Why Gas Stations Have Competitors Nearby (2008) - uniclaude
https://mindyourdecisions.com/blog/2008/03/25/game-theory-tuesdays-hotelling%e2%80%99s-game-or-why-gas-stations-have-competitors-nearby/
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gibba999
The model seems incorrect:

1) It misses pricing. If I am next to another gas station or hot dog stand, I
have competitive pressure; my best strategy is to price just below the
competitor. If I am isolated, I can jack up prices by however much people are
willing to spend to not go further.

2) It also assumes just two players on a beach. With more players and a longer
beach, you end up with everyone spread out. With three players, the two outer
players will continue to move in towards the center player. If the center
player ever has less than 1/4 of the beach, they'll want to move to just
outside one of the other two players, who will then want to move to the
center.

~~~
zwaps
This is actually a common misunderstanding. The example of ice-cream vendors
on a beach or, in this case, gas stations, are toy examples.

The model is not really about location. It is about product differentiation in
SOME dimension. By extension, it is also about the number of market
participants with differentiated products. Distance or location stands for
this differentiation of products.

This is typical of econ models. They are not trying to be realistic, but show
a certain mechanism.

By the way, the model can be extended with different pricing mechanisms and
many actors (for example on a circle, not a line, to show that generally too
many firms enter a market than can be supported).

As for your points:

1) Pricing depends on demand and maket configuration. Usually, one would work
with what is called the "inverse demand", where the company has basically
solved price as a function of the the amount of goods it WANTS to sell, given
other market participants. Note how pricing is implicit in this. While these
functions are of course usually assumed to be well behaved, you could do what
you want here. So it doesn't miss pricing, it just abstracts from it

In particular, that you can jack up prices depending on location is
_explicitly_ in this model.

2) Note how the locations depend on the distribution of demand along the
"line". Your intuition depends on this as well. If demand is concentrated
somewhere in the middle, you will get a different result...

~~~
zwaps
By the way, think about what would happen if you could differentiate in two
dimensions? You'd be on a plane or a circle on which a demand distribution
exists... etc.

That's the idea.

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jaysonelliot
What I'd also like to know is why a cluster of gas stations ends up with
different prices. If you have a competitor next door advertising gas at, say,
$3.95 per gallon, why would you put up a giant sign saying yours cost $4.05?

Even more baffling, as a customer, why would you go to the more expensive
pumps? Sure, loyalty discounts might account for a certain number of
decisions, but that can't be the only answer. I've often wanted to go up to
someone pumping gas at a higher price when there's a cheaper station right
next door, and just ask them how they decided to pay more.

~~~
grahamburger
I never look at the price before I go to the pump. If there are multiple
stations available then I probably made the choice based on which was easier
to get to (side of the street / which direction I'm going) or which looked
like it will have cleaner restrooms if I need to pee. I'm not super wealthy or
anything, but none of the vehicles I drive take a ton of gas so a difference
of 10¢ per gallon just isn't really worth thinking about.

~~~
copperx
I've seen differences up to $0.30. Pay me $4 to make a left turn? Sign me up.

~~~
jbarberu
Driving in Florida, I'll gladly pay $4 to _skip_ a left turn... :)

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Xcelerate
It's very interesting seeing an article on HN about this. Before my current
job, I worked as a data scientist at one of the largest travel centers in the
U.S., and we analyzed this problem almost nonstop with regard to both gas and
diesel prices. A good pricing strategy is quite complex, and you'd be
surprised at the number of factors that goes into it.

~~~
this2shallPass
Can you talk more about a good pricing strategy for gas and diesel prices,
some factors involved, or things you learned?

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freedomben
This makes sense, but it's very unfortunate. In Utah there are quite a few
small communities that have no services at all so you have to drive maybe 20
to 30 minutes for the closest anything. Needless to say this sucks. In the
rare event that a small town has only _one_ station it is virtually guaranteed
to have extremely high prices (with one exception that I know of). It's one of
the reasons why even tho I prefer a more rural place to live, I opt to live
closer to the big city instead. We are getting to a point where the
opportunities and conveniences of the big city are making small town life much
more difficult (in contrast) and expensive. You have to forgo many
conveniences. Perhaps things will change in the future, but that is definitely
not the current trend.

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galaxyLogic
I don't drive a car nor buy hot-dogs but what struck me as a convincing and
important example is how all news-stations play the same news. And not only
that but they also much broadcast at the same time.

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harish_yadav
The Gas Station's game doesn't seem to correlate well with the game suggested
with the Hot Dog stand analogy. Setting up gas stations is expensive and
requires a lot of infrastructure setup and time, once set up people just can't
move it around in a city. Now if I were setting a new gas station I would
place it in a location where I win greater market share and is disadvantaged
to the competitor. Due to the resource constraints, the competitor has to just
stay where they were. Gas station locations don't lie in efficient markets
where the equilibrium is achieved by being close to each other.

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tibbon
Another way of thinking about it; when you've been on the highway and see gas,
and pull off the highway, and there's a sign "1 gas station left" and "3 gas
stations right", you almost always go right. You probably try to go to the
first station, but if you pass it, you go to the second station. Each one
tries to be the "first" station there, but only one can be first, and the real
estate costs for gas-stationed zoned properties probably go up for the closest
one.

------
dang
A discussion from 2011:
[https://news.ycombinator.com/item?id=2814864](https://news.ycombinator.com/item?id=2814864).

------
Theodores
This article is writing as if this is a growth business, we are a century in
and it is more a game of musical chairs, so it is a question of where the
survivors are located, not where new entrants start.

There used to be petrol stations everywhere, it was the hot new product to
sell once upon a time and every garage would want to have a forecourt. The
infrastructure needed then wasn't that much more sophisticated than that
needed for a lemonade stand. You could just put the sign up and profit from
the passing trade very much on a know-the-customer-personally basis. No
upsells were needed, it was an easy way to print money.

Then the market got saturated. Much like mobile phone shops, suddenly small
towns had half a dozen of them.

Then this business got picked off by the supermarkets in European markets.
They sold own brand petrol at first at a better price than the established
brands. The brand did not matter as it is a commodity product. They did not
have to make money off it as they were luring customers in for their big shop.

After this round of musical chairs only supermarkets, convenience stores and
motorway service stations survived.

I think it has been a cruel business and it is quite sad that something so
valuable has no return in it for the end retailer.

~~~
svachalek
"every garage would want to have a forecourt"

In American this would be every... mechanic? would want... a gas pump out
front?

~~~
mrguyorama
As an American, "garage" is still perfectly valid nomenclature

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virgilp
This is a powerful example but for some reason it never dives into what
happens when the 3rd stand appears :D

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jmpman
Explains why political primaries tend to skew so far left or right, and yet
when the final election comes, the candidates race towards the middle while
framing their opponents as extremists.

~~~
handedness
[https://geopoliticalfutures.com/in-defense-of-party-
bosses/](https://geopoliticalfutures.com/in-defense-of-party-bosses/)

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gumboshoes
Another factor: commercial use and potential hazard zoning. Cities may
disallow gas stations in large areas.

~~~
nathan-io
Indeed, I'd say in the case of gas stations in particular, zoning could be the
primary cause of such clustering.

------
paulsutter
Zoning is a giant factor in clustering of gas stations in populated areas,
link below an example.

[https://www.apnews.com/7bf2dceaacfc48178535dfc56d5cdbf3](https://www.apnews.com/7bf2dceaacfc48178535dfc56d5cdbf3)

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bobsoap
In economics, this is called clustering. Malls and shopping streets are a good
example, but also the NYC Diamond District, Las Vegas, and Silicon Valley.

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nostrebored
What happens in the repeated game? Seems more applicable to the current
problem.

~~~
__HYde
How often do gas stations move locations?

~~~
nostrebored
How often do gas stations franchise and expand locations within a similar
region?

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the-dude
Reminds me of my own observation in the US ( 2001 ) : car dealers concentrate.

~~~
hoopism
Anyone going to dealerships in 2019 is already losing. I made that mistake
recently with my wife's car. We went into dealer and I talked to manager. We
knew exact model and color we wanted and told him we were there to see it in
person and then would get quotes from area dealers... Because he was nice I
told him to just give me his absolute best price then and we'd consider it...
it was few grand more than I knew I could get so I went the email/quote route.
2 weeks later he won the pricing quote and was 6 grand lower than what he said
was his lowest in the showroom. Only shop via email. Ever.

~~~
legohead
Reminds me when I bought my second car. I wanted to test drive 2 different
cars at a couple dealerships. I called ahead to the first one and asked if the
model I wanted was available. They said yes, and asked what I wanted to pay
for it. I totally low-balled them because I didn't care at this point. When I
got there they gave me the price I offered. Never test drove the second car...

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didgeoridoo
> If voters pick the candidate closer to their views, and voters are spread
> out across the spectrum, then both candidates would converge to the middle.
> It’s no surprise that politicians seek the “average vote.” It also suggests
> why it’s so hard to tell the difference between candidates during the
> campaign trail.

Needs a (2008)...

~~~
copperx
It's incredible how the political landscape has forever changed in the last
years.

~~~
lotsofpulp
Fewer people having more voting power via their states having disproportionate
voting power changes the game.

