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.
*The second major problem which this model does not suffer though is that when your model gets closer to reality, its predictions become highly dependent on many coefficients the true values of which you do not know most of the time.
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.
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.
I'm not sure how this aspect applies to the political senario, which is the more interesting one.
That's more difficult. For in most voting systems you have to take strategic voting into account. E.g. in a winner-takes-all systems people don't want to waste their votes, and thus the system tends towards two parties.
That's not true. Let me explain. In this model (1 dimensional spectrum, be it distance or whatever), if a third player entered the market and the other two players are located at the center then the new players rational choice is to be on either side of the incumbents. He therefore sandwiched the middle player and stole all of his customers, the middle player will then move to the outside and again a player will have been sandwiched. The cycle repeats.
But if you add in costs associated with relocating (time or revenue lost or rebranding or moving costs) then this no longer is an effective strategy. A player might realize that this would happen and purposely not locate in the middle in order to avoid a fight. I don't quite remember the solution to a three player model but that was also based on an assumption that there are only three players.
It gets highly complicated when there is the possibility of new entrants. The lesson could be watch out for new entrants and stay nimble (so it is cheap for you to react when there are new entrants).
If the equilibrium is such that both ice cream sellers stay near the median, we might also imagine that the # of customers available to both sellers depends on how far they have to walk. I don't think it's unrealistic to imagine that the # of willing customers decreases as distance to the nearest seller increases. So in the case described by the article, some of the people on both ends of the beach might decide agaist buying ice cream at all, given they have to walk half way across the beach.
This is exciting to me because it might indicate that if both sellers were to cooperate (@ .33 and .66 distances along the dimension) both sellers could be better off in the aggregate because the potential number of customers they are splittig could be larger than at the nash equilibrium described in the article.
Expading the scope beyond even the sellers, we might also imagine that as a result the entire system is better off because the average customer saves time walking by having more evenly spaced ice cream sellers. That means even if we were to imagine the demand function was completely inelastic with respect to distance to nearest seller, at the very least the customers save time on average walking to the stands. This time could more productively be used to dream, plan, create the next startup, come up with the next big idea for society, etc.
The value of cooperation, expading the pie, and not assuming a zero sum game...as an optimist, these are the themes I take away from something like this.
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?
On the vendor side of the app, you'd have a list of orders and a map of the customers. Done properly, this could be a big win for vendors, since ordering would be easier, increased volume would be likely, and they would be better able to plan production/delivery.
Basically, it's like Loopt but for hyper-local b2c. Instead of hooking up singles or friends, you're hooking up cart vendors and their customers.
One way I could see working is a widespread existing business collection/franchise spreading out into more and more products over time - so companies/organisations as diverse as interflora or starbucks might start by offering products in their core competancy online, maybe start allowing other companies to join the scheme to cover gaps in their coverage, and eventually spread out to cover a wide range of goods so the website/app grows beyond the original founder.
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).
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.
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.
It started when JFK pushed civil rights. This made Democrats popular with Northern civil rights activists. Nixon took advantage of this with his "Southern strategy" that used the issue as a wedge to get Southerners to vote Republican for the first time ever. (Previously the South wouldn't vote Republican because they held the Republicans responsible for the Civil War.) The swap cascaded from there as each successful candidate got there by appealing to what had once been the other party's base. (Reagan took a particularly chunk, hence the phrase "Reagan democrat".)
The swap completed with George Bush.
Please add a [JAVA] tag in future.
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>
But it really makes no sense why the author would do that - it's just a straightforward, somewhat boring image. Thoughts?
Please add a [FLASH] tag in future.
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?
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.
Metres, not "mi" miles.
That said, the difference between a third ice cream cart and a 30th ice cream cart in the area is great. But then, the market should correct itself so that the optimal number of ice cream sellers are available.
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.
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.
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.
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.
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.
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.
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.