Hotelling and Hawkins

In his Town Crier column last Wednesday, Chris Lupke wrote that:

A mall on the Idaho border with no promise of tax revenue won't help our parks or police and won't pave our streets. But what it will do is permanently situate the retail center in and near Moscow, miles from Pullman. Better negotiators could have insisted it be sited closer to our retail base.

Lu Laoshi may be a "national expert" in Chinese and Chinese culture, but he doesn't know jack about the economics of retail.

Some 80 years ago, economist Harold Hotelling devised an analogy to explain the spatial functioning of the marketplace.

His analogy became known as "Hotelling's Model":


Suppose there is a beach which is 100 yards long. Assume beachgoers are spread evenly across the length of the beach. Along come two ice cream vendors. The vendors are selling product of similar quality and price (ceteris paribus.) Logically, the layman would expect the vendors to place their carts at the 25 and 75 yard lines of the beach, thus allowing for an equal division of profits and providing the greatest convenience to beachgoers, as no one would be more than 25 yards from an ice cream cart.

However, one vendor will recognize that by relocating closer to the midpoint of the beach he can achieve an increase in market share. So, on the illustration above, the vendor at Position A will move his cart to the 30 yard line, increasing his market share to 52 1/2 %. The vendor at Position C will compensate by moving his cart to the 70 yard line. This continues as both vendors move incrementally towards the middle of the beach. Eventually, both vendors' carts are at Position B, right next to each other. They have achieved economic equilibrium, with each having a 50% market share.

Hotelling's Model, as you might guess, is very sensitive to cost assumption. There must be some cost to traveling because customers prefer the closest vendor. But these costs must be small, because the people at the end of the beach continue to buy the same amount no matter how far they are from the nearest vendor. If traveling costs are less, then people might not care whether they go to the nearest vendor. If they are greater, so that when the vendor gets far away, people do not bother to go, the vendors will no longer cluster at the middle.

Pullman residents, being six miles away from Hawkins, have negligible traveling costs. Travel costs for Moscow residents are even less. Put the shop in the middle, the customers will come, especially if there is already other retail clustered there. That explains why Hawkins chose the location it did. All very logical and very much in accord with economic principles. That is why the Pullman/Moscow corridor is a potential gold mine.