Question

Hotelling (1929) developed a model to explain the location and pricing behaviour of firms. His model can be used to study monopolistic competition by viewing products as being located in product or characteristics space. Explain about Hotelling’s Location Model.

Answer 1

Hotelling's model deals with locational interdependence; the location of industries can't be understood without reference to the location of other industries of like kind.
Example: Two similar vendors would locate next to each other in the middle of a market area to maximize profit.

Locational Interdependence .

This theory was developed by economist Harold suggests Hotelling. It suggests that competitors, in trying to maximize sales, will seek to constrain each other's territory as much as possible which will therefore lead them to locate adjacent to one another in the middle of their collective customer base. Example Two ice-cream vendors moving closer to each other.

According to this theory :

• Locations are most influenced by the location of competitors.
• Competitive firms with identical cost structures arrange themselves together to create a spatial monopoly.
• Emphasis on revenue rather than cost.
• Socially optimum solution means locating in socially acceptable distance with your competitor to take courtesy to your customers.
• Nash equilibrium which refers to locating close to competitors to try to achieve the highest revenue and using marketing techniques to attract customers.
• This theory suggests that competitors trying to maximize sales will seek to constrain each other's territory as much as possible which will therefore lead them to locate adjacent to one another in the middle of their collective customer base.

To conclude location theory is a  logical attempt to explain the locational pattern of an economic activity and the manner in which its producing areas are interrelated.