Geography Reference
In-Depth Information
for broadly the same market area, competitor firms will only be located
next to each other in situations in which price competition is largely
ruled out either by mutual agreement or by various forms of non-price
competition.
A fundamental analytical issue now arises, in that the Hotelling loca-
tion model which is developed above in the context of geographical space
can be more or less equivalently applied by analogy to the case of product
space.
3
If we reconsider the space defined by
OL
as now being transformed
into a product characteristics space, the same Hotelling equilibrium loca-
tional result ensues as with the geographic space model. The way that this
result can be interpreted in general is that if products exhibit a range of
characteristics which can be ordered from
O
to
L
, the competition between
the firms ensures that both competing firms produce products which are
very close to each other in terms of product characteristics. As such, the
locational proximity between the firms in the case of the geographical
space is also mirrored in terms of the similarity of the competing products'
features in terms of characteristics space.
Yet, it might appear that there is a slight inconsistency here in that, as
we have already seen, firms located in the same place producing prod-
ucts with the same characteristics will be very vulnerable to the Bertrand
problem. This apparent inconsistency gives rise to what is known as the
'Hotelling paradox', whereby in order to avoid the Bertrand problem, the
mutual interdependence between firms often gives rise to firms producing
basically the same product, but at the same time using non-price competi-
tion to make these products appear the most different to each other. As
such, if we link the insights from both a geographical and a product space
interpretation of the Hotelling model, the combined outcome is that where
the firms are physically located in the same location, they will be selling
products which are essentially the same products, although these will also
made to appear as the most differentiated products in terms of non-price
competition.
4
Yet this strict outcome may not always hold. Indeed, there
are cases where firm clustering may give rise to some degree of price com-
petition as well as product competition. In order to see this, we need to
further investigate not only the parallels between the geographical concept
of space and the product characteristics concept of space, but also the
interaction between the two.
3.6
THE SALOP MODEL OF SPATIAL COMPETITION
The idea of the analogy between firm positioning strategies in geographi-
cal location and location strategies in terms of product characteristic space
