Hotelling’s Location Game, explained.
Hotelling's location game explores spatial competition: sellers choose positions partly in response to where customers and competitors are located.
Why it happens
With uniform customers, equal prices, and nearest-shop choice, the midpoint between two shops divides their customers. Moving toward a rival can capture more of one side while reducing geographic separation between options.
Hotelling used spatial competition to study how seller location affects demand when buyers prefer nearby options.
Read the result
Inspect the customer split and the full best-response curve. Holding the rival fixed is different from predicting where both rivals move after responding to one another.
A worked example
Two stalls on a 100-unit street
Place shops at 25 and 75 with customers spread uniformly along the street.
Their midpoint is 50, giving each half the customers. Moving the first shop to 49 moves the midpoint to 62.
The moving shop captures a larger side of the street under these assumptions, even though customers may travel differently.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Customers are uniformly spread from 0 to 100 and choose the nearer seller at equal prices. The indifference point is the midpoint of shop locations. Your market share equals the length of street nearer your shop; co-location splits customers evenly. The plot shows your share at each possible location holding the rival fixed.
Where this idea is useful
A practical use
Two food stalls, clinics, or service outlets may choose locations partly in response to a nearby rival.
A common misconception
“Clustering always gives customers the best locations.”
A seller's market-share incentive and customers' travel costs are different objectives. The simple competition rule need not minimize total travel.
What this explanation leaves out
- Equal prices, uniform customers, identical quality and pure distance costs are strong assumptions. The chart does not solve a full price-and-location competition model.
Why don't all real shops converge on one point?
Prices, quality differences, uneven customer density, multiple competitors, space constraints, and travel behavior change the incentives. This model fixes those factors to isolate location competition.
Does the location that helps one seller also reduce travel for the customers?
Associated thinkers
Further reading
Explore the original research or the teaching reference behind this experiment.