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Location, Location, Location! A Classroom Demonstration of the Hotelling Model

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Author Info

  • Lisa R. Anderson

    ()
    (Department of Economics, College of William and Mary)

  • Beth A. Freeborn

    ()
    (Department of Economics, College of William and Mary)

  • Jessica Holmes

    ()
    (Department of Economics, Middlebury College)

  • Mark Jeffreys

    ()
    (Behavioral Science Department and Integrated Studies Department, Utah Valley State College)

  • Dan Lass

    ()
    (Department of Resource Economics, University of Massachusetts)

  • Jack Soper

    ()
    (Department of Economics and Finance, John Carroll University)

Abstract

This paper outlines a classroom experiment that complements the standard theoretical discussion of Hotelling's (1929) spatial competition model. The exercise provides students with a deeper understanding of the intuition behind competitive clustering, resolving the Bertrand paradox, and product positioning. Students act as street vendors operating within a “linear city.” Each student chooses a location, taking into account the locations of competitors and the transportation costs of customers. Other treatments include choosing price given location and a two-stage model of location and price. The experiment can be implemented in any size class, with very little preparation. It is well-suited for courses in microeconomics, industrial organization, game theory, experimental economics, and public choice economics, and also can be incorporated into political science courses.

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File URL: http://economics.wm.edu/wp/cwm_wp44rev.pdf
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Bibliographic Info

Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 44.

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Length: 30 pages
Date of creation: 18 Sep 2006
Date of revision: 05 Feb 2007
Handle: RePEc:cwm:wpaper:44

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Keywords: classroom experiment; location choice;

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References

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  1. Huck, S. & Müller, W. & Vriend, N.J., 2002. "The East End, the West End and King's Cross: On clustering in the four-player Hotelling game," Open Access publications from Tilburg University urn:nbn:nl:ui:12-112550, Tilburg University.
  2. repec:wop:humbsf:2000-24 is not listed on IDEAS
  3. Eaton, B Curtis & Lipsey, Richard G, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Review of Economic Studies, Wiley Blackwell, vol. 42(1), pages 27-49, January.
  4. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Luís M. B. Cabral, 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, December.
  6. Shaked, A, 1982. "Existence and Computation of Mixed Strategy Nash Equilibrium for 3-Firms Location Problem," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 93-96, September.
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