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Hotelling's Agents - Eveline van Leeuwen

12:00 - 13:00 14 February 2012

Location: CASA Offices (90 Tottenham Court Road)

Eveline van Leeuwen

Hotelling’s metaphor of spatial competition on Main Street has become one of the most important models in understanding strategic product differentiation. A vast literature has evolved, discussing extensions of the model with respect to the nature of transport costs, distributions of consumers (or preferences), dimensions and so on.

Multi-stage games like the Hotelling game are usually solved analytically by backward induction. our paper adds to the literature by explicitly taking consumer attitudes into account in a spatial competition model and by assessing the impact on location choices made by firms. In order to do so, we translated Hotelling’s model of spatial competition into an agent-based model. Our agent based model is based on decision-rules that are consistent with the concept of Nash equilibrium. The aim of the model is to find the optimal location for a firm to be located, considering the distribution of consumers. The empirical part of the paper focuses on how consumer attitudes affect firms pricing and location decisions in the context of spatial competition. The use of agent-based modeling allows us to analyze consumer attitudes without having to impose continuous demand functions − which is required when solving it analytically−, thus greatly increasing our scope of analysis.