Hotelling Location Model Flashcards
What are examples of the industrial location model with a unique Nash equilibrium ? Give 3 examples
1) Rival TV stations have similar programmes at the same time
2) Coffee shop at the same end of the street
3) clustering of petrol stations close to each other on main roads
Describe the Hotelling model in regards to ice cream venders on a beach.
There are 5 steps.
1) People are evenly (uniformly) distributed along a beach one mile long.
2) the good solves cannot be differentiated by price and quality
3) they are ale to change their location to maximise profits by increasing the amount of customers they have
4) Given distribution of customers, both players in the game, Ben and Jerry will have incentive to move to another location until they have split the market in half and the centre of the beach.
5) There exists a tendency for both vendors to move towards the centre of the beach.
Explain the Nash Equilibria process which justifies the hotelling model for ice cream
A Nash equilibrium is a set of strategies one for each player in which is the best response given the strategy chosen by the other player. They are self enforcing and stable. These won’t be until both players feel their response is the one that maximises their payoff given the strategy in play .When both vendors are situated in the middle of the beach, neither can improve its sales (and therefore its profits) by unilaterally changing location.
How did Anthony Downs apply the Hotelling model of industrial competition to political competition in 1957?
there are 6 steps
1) Voters are distributed uniformly along the political spectrum from left to right
2) Parties are assumed to be rational profit maximisers who wish to increase their payoff by increasing their votes.
3) the way in which they can do this is by changing the location, ie the content of their policies on the political spectrum.
4) customers or voters are rational and will pick the party which is closest to them on the spectrum as customers picked the ice cream closest to them on the beach.
5) Nash equilibrium occurs when both parties target the preferences of the voter whose preferences lie at point 50 (the ‘median voter’).
6) political competition is a race to the centre of the political spectrum
Explain the Nash Equilibria process which justifies the hotelling model for political party competition
A Nash equilibrium is a set of strategies one for each player in which is the best response given the strategy chosen by the other player. They are self enforcing and stable. These won’t be until both parties feel their response is the one that maximises their payoff given the strategy in play. When both both parties are situated in the middle of the political spectrum, neither can maximise votes (and therefore its profits) by unilaterally changing position on the political spectrum.
