Hotelling's Law
Hotelling's law, also known as the principle of minimum differentiation, is a caveat to the usual incentives to differentiate a product.
Contents
Description
Consider a spatial market model with two firms. Their products are considered replacements for each other, so their market capture is determined purely by proximity to consumers.
The dominant strategy in this model is for both firms to co-locate at the center of the consumer distribution. For any arbitrary starting positions, either firm can capture more of the market by moving towards the center. When both firms are at the center, all consumers are indifferent between the firms' products, and neither firm can move without losing market capture.
A critical assumption is the number of firms; the system is unstable given even three.
The law was proposed by Hotelling (1929). It was further formalized by Smithies (1941).
Usage
Median voter theorem is an application on politics. Downs explicitly derived the theorem from Hotelling's work.