Sunday, January 6, 2013

A Hotelling model with a twist.

Good morning economists. Last night we were driving on a rather busy two way street when we noticed that a newspaper kiosk opened business right across the street from another one that has been established for nearly a decade. Our first thought, was that this decision was rather silly since the new kiosk would effectively be in competition with the old one because of the choice of location. But is that truly the case?

I remembered the old Hotelling model example of the two ice cream vendors on a beach.
Both vendors are selling the same ice cream and charge the same price. As such people to the left of point B on the beach will prefer vendor A because the distance to that vendor is smaller than the distance to vendor C. The opposite applies for the people to the right of point B. 

According to the model above, the new newspaper kiosk should essentially move its operations a fair amount of distance away from the old kiosk. In that manner, it will be able to capture more customers as the distance from the midpoint (between the two kiosks) grows. 

BUT what the traditional Hotelling model ignores, is the DIRECTION of travel of potential customers. Last night, when we observed the new kiosk phenomenon, it was raining pretty hard. I asked myself, what is the probability of someone parking his/her car on my side of the street and then crossing over to the older kiosk? Given that they both sell exactly the same goods at exactly the same prices the answer would be that the probability will be really really small. Especially because a mile further down the street there was another kiosk on our side of the street. 

Taking into account the direction of travel, makes this a whole new ball game. The kiosk on the left of the street is in a sense in competition with the kiosk on the same side of the street located a mile away (as opposed to the kiosk located across the street). 

I have a feeling how this battle will turn out and I will let you know as soon as it happens.

What do you think will happen?

Have a nice day!

1 comment:

  1. it's very common to us that we prefer to stop to kiosks that are in our direction of travel!!!