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

Author

Listed:
  • 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.

Suggested Citation

  • Lisa R. Anderson & Beth A. Freeborn & Jessica Holmes & Mark Jeffreys & Dan Lass & Jack Soper, 2006. "Location, Location, Location! A Classroom Demonstration of the Hotelling Model," Working Papers 44, Economics Department, William & Mary, revised 05 Feb 2007.
    • Handle: RePEc:cwm:wpaper:44
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    File URL: http://economics.wm.edu/wp/cwm_wp44rev.pdf
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    References listed on IDEAS

    as
    1. B. Curtis Eaton & Richard G. Lipsey, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(1), pages 27-49.
    2. Steffen Huck & Wieland M¸ller, 2002. "The East End, the West End, and King's Cross: on Clustering in the Four-Player Hotelling Game," Economic Inquiry, Western Economic Association International, vol. 40(2), pages 231-240, April.
    3. Cabral, Luis M. B., 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, December.
    4. 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.
    5. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    6. Steffen Huck & Wieland M¸ller, 2002. "The East End, the West End, and King's Cross: on Clustering in the Four-Player Hotelling Game," Economic Inquiry, Western Economic Association International, vol. 40(2), pages 231-240, April.
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    Cited by:

    1. Michiel Bliemer & Laurent Denant-Boemont & Sabrina Hammiche & David Hensher & Corinne Mulley, 2020. "Urban Costs and the Spatial Structure of Cities: A Laboratory Experiment," Working Papers halshs-02440516, HAL.
    2. Michael P. Cameron, 2021. "Two models for illustrating the economics of media bias in introductory economics," Working Papers in Economics 21/08, University of Waikato.

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    Keywords

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    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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