Why do firms cluster in the middle in Hotelling's model?

With fixed prices, moving toward a rival keeps all the customers on one's own side while capturing more of those in between, so both firms move until they meet at the center.

Do real firms always become alike?

No. When price competition is intense, firms have a stronger incentive to differentiate to soften it, so outcomes depend on travel costs, price competition and the distribution of consumer tastes.

Hotelling Model

📈 Economics By CampusDown Wiki Editorial Team Last updated October 26, 2026

The Hotelling model is Harold Hotelling's 1929 model of spatial competition, explaining why competing firms that choose locations along a line of evenly spread consumers tend to cluster together and become alike.

Contents

1. The basic model: vendors on a beach
2. Price competition and revisions
3. Extensions to politics and evidence
4. FAQ
5. References

The basic model: vendors on a beach

In "Stability in Competition" (1929), Harold Hotelling assumed customers spread evenly along a beach of length one, each buying from the nearest seller. If two ice cream vendors stand at the one-quarter and three-quarter points, total walking distance is minimized, which is socially desirable. Yet each vendor gains customers by edging toward the other, so in the Nash equilibrium both stand side by side in the middle. This tendency of competitors to resemble one another is called the "principle of minimum differentiation" or "Hotelling's law." Hotelling used it to explain why products, church doctrines and party platforms become excessively similar.

Price competition and revisions

The original model let firms choose prices as well as locations, and d'Aspremont, Gabszewicz and Thisse (1979) showed that Hotelling's conclusion was wrong. With linear travel costs no price equilibrium exists when firms are close together, and with quadratic travel costs the equilibrium is "maximum differentiation," with firms at opposite ends, because proximity triggers fierce price competition that erases profits. Later work found that minimum differentiation returns when consumer tastes are sufficiently heterogeneous (de Palma et al., 1985), and that in multi-dimensional spaces firms differentiate strongly on one characteristic and minimally on the others (Irmen and Thisse, 1998). Salop (1979) used a circular city to analyze entry and the number of firms, and this family of models became a standard tool for analyzing oligopoly and product differentiation (Tirole, 1988).

Extensions to politics and evidence

Anthony Downs (1957) placed voters along a left–right ideological line and argued that two vote-seeking parties converge on the center, which together with the median voter theorem became central to public choice theory. Abstention, primaries and the threat of third-party entry, however, can pull parties away from the center. Empirically, Netz and Taylor (2002) found that U.S. gasoline stations locate farther apart where competition is more intense, supporting the price-competition logic. In media, Mullainathan and Shleifer (2005) modeled slant that caters to readers' beliefs, and Gentzkow and Shapiro (2010) showed that U.S. newspaper slant is driven more by local readers' politics than by owners.

FAQ

Why do firms cluster in the middle in Hotelling's model?: With fixed prices, moving toward a rival keeps all the customers on one's own side while capturing more of those in between, so both firms move until they meet at the center.
Do real firms always become alike?: No. When price competition is intense, firms have a stronger incentive to differentiate to soften it, so outcomes depend on travel costs, price competition and the distribution of consumer tastes.

Sources reviewed: 2026-10-26

References

Hotelling, H. (1929). Stability in competition. Economic Journal, 39(153), 41–57.
d'Aspremont, C., Gabszewicz, J. J., & Thisse, J.-F. (1979). On Hotelling's "Stability in competition". Econometrica, 47(5), 1145–1150.
Downs, A. (1957). An Economic Theory of Democracy. New York: Harper & Row.
Salop, S. C. (1979). Monopolistic competition with outside goods. Bell Journal of Economics, 10(1), 141–156.
Eaton, B. C., & Lipsey, R. G. (1975). The principle of minimum differentiation reconsidered. Review of Economic Studies, 42(1), 27–49.
Economides, N. (1986). Minimal and maximal product differentiation in Hotelling's duopoly. Economics Letters, 21(1), 67–71.
de Palma, A., Ginsburgh, V., Papageorgiou, Y. Y., & Thisse, J.-F. (1985). The principle of minimum differentiation holds under sufficient heterogeneity. Econometrica, 53(4), 767–781.
Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, MA: MIT Press.
Irmen, A., & Thisse, J.-F. (1998). Competition in multi-characteristics spaces: Hotelling was almost right. Journal of Economic Theory, 78(1), 76–102.
Netz, J. S., & Taylor, B. A. (2002). Maximum or minimum differentiation? Location patterns of retail outlets. Review of Economics and Statistics, 84(1), 162–175.
Mullainathan, S., & Shleifer, A. (2005). The market for news. American Economic Review, 95(4), 1031–1053.
Gentzkow, M., & Shapiro, J. M. (2010). What drives media slant? Evidence from U.S. daily newspapers. Econometrica, 78(1), 35–71.

Reports and materials that use this theory (Korean)

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This article was last updated on October 26, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.