Why are all the shops so close to each other?

Gulnara keeps telling me that she needs to go shopping – but of course there is a nationwide quarantine so she’s stuck at home listening to me.

Although I feel some sympathy with her situation, I was worried that I will get dragged all around the place when we do go shopping in the future – and so we’ve gone online to look at Google Maps to figure out where we’ll need to walk. Having a look it appears we won’t have to walk around that far – as the clothing and perfume stores are all right next to each other.

So why is this?

At face value that is quite strange – these firms compete with each other, so wouldn’t they want to be in quite different places to collect different customers? Especially when your location can allow you to differentiate yourself from your competitors.

Take the example when we were talking about loss leaders with toilet paper, it appears important to have your own little place where you can get consumers to shop and it is costly for them to go elsewhere – and if you were placing your firm next to a competitor, it is almost costless for your customers to just jump ship!

So at face value this appears to make little sense – we imagine that these monopolistic competitive firms would want to differentiate themselves from their competitor, and so locate far away from them. So how can we understand what we do observe?

Hotelling’s law

As noted above, the “location” is one way of differentiating a product – if we think differentiating allows you to act more like a mini-monopoly rather than a competitive firm, then it seems like firms have an incentive to do this.

But quite often they don’t on this margin. Why?

This very question led to the development of a concept called Hotelling’s Law after a bloke named Harold Hotelling who published a paper in 1929 on it. He developed a “linear location model” that helped to explain why businesses selling similar goods may locate next to each other.

As I am practicing making online videos for my lectures – due to COVID – I will also talk through this in a video below: