Hotelling's Principle of Market
Hotelling was one of the first to introduce the principle of spatial
competition (1929) by investigating how sellers would choose locations
along a linear market. He assumed that the product was uniform so customers
would buy from the most convenient location (nearest seller) and that the friction of distance
was linear and isotropic. The total price for the customer is thus the market
price plus the transport price (time or effort spent to go to the market).
Under such circumstances, two competitors will select locations A and
B for optimal market coverage. With P1 being the market price, the market
boundary would be F1 (point of cost indifference) since right of F1,
customers would get a lower price at location B instead of at location
A and left of F1, customers would get a lower price at location A. If
for any reasons, location A is able to lower the market price from P1
to P2, then its market area would expand at the expense of location
B, from F1 to F2.