Hotelling Line Research Articles

Cournot Competition on the Hotelling Line Yields at Most Three Varieties

Cournot Competition on the Hotelling Line Yields at Most Three Varieties

The Hotelling Line at 95: Introduction to the Special Issue

The Hotelling Line at 95: Introduction to the Special Issue

Common ownership in a delivered pricing duopoly

This study investigates how common ownership affects the location choice of duopolists. We formulate a shipping (delivered pricing) model on the Hotelling line in which firms choose their locations and then compete in prices. We show that even if high prices due to common ownership do not reduce welfare under inelastic demand, common ownership can still lead to welfare loss by promoting dispersion among firms. We also find that common ownership promotes transport cost-reducing investments and accelerates welfare loss in excessive investments.

Targeting Advertising Spending and Price on the Hotelling Line

We examine whether competing firms in a Hotelling model should increase the scope of their targeting from advertising spending or price alone to both advertising spending and price targeting.

Influence of Physical Fitness Activities on Productivity of Hotel Managers: Perspective of Star Rated Hotels Within Mombasa County

This study sought to determine the extent to which participation in physical fitness activities found within health and fitness clubs in star rated hotels in Mombasa County enhanced manager’s productivity. Though studies previously carried out concentrated on health benefits, nothing much has delved in productivity benefits, more so for hotel line managers. To address this gap, this study focussed on Hotel line managers found within the twelve star rated hotels within Mombasa County that have Health and Fitness Clubs. A cross sectional design was adapted. Since each star rated hotel has at least ten line managers, one hundred and twenty questionnaire were developed and subjected to the one twenty line managers. Both descriptive analysis and linear regression analysis, were used to analyse the resultant data to establish whether there was a significant difference between the physical fitness activities available in the hotels for the managers and their productivity. There was a high correlation between managers’ physical activities and productivity (R =0.824) which could be explained by 74.1% of the responses. The P=0.026 showed that there is a significant relationship between manager’s participation in health and fitness activity and productivity in star rated hotels within Mombasa County. The regression equation; Managers’ productivity =21.864+ 0.712 (managers’ physical activity) shows that for every additional element of managers’ physical activity, productivity would be expected to increase. As such line managers’ participation in health and physical activities found within the star rated hotels could significantly boost their productivity. Other than bridging the research gap, the eventual results inform industrial policy makers on the need to either enlist line managers to wellness clubs or incorporate wellness clubs within the hotel premises for their use.

Strategic take-back programs when consumers have heterogeneous environmental preferences

We look at the strategic introduction of take-back programs (TBPs) which offer consumers a discount on their next purchase (reward) when they drop off previous purchases. In a Hotelling duopoly, consumers are heterogeneous not only in terms of their location on the Hotelling line but also in terms of their recycling preferences. Firms introduce TBPs to obtain a market share advantage (reward effect) and/or to recover the intrinsic value of the recycled units (recycling effect); their choice of the optimal reward balances these two effects: for instance, a firm might be willing to introduce a TBP, even if this means losing money on each recycled unit, in order to prevent the competitor from gaining a too large market share advantage. Comparing the level of TBP uptake at the market equilibrium to the one that maximizes social welfare, we show that a lower or higher TBP uptake can be socially desirable, depending, among other, on the weight that is given to the environmental benefits of TBPs. Several extended producer responsibility policies are discussed in terms of their potential to encourage TBP uptake and their overall impact on social welfare.

Platform Competition with Multihoming on Both Sides: Subsidize or Not?

A major result in the study of two-sided platforms is the strategic interdependence between the two sides of the same platform, leading to the implication that a platform can maximize its total profits by subsidizing one of its sides. We show that this result largely depends on assuming that at least one side of the market single-homes. As technology makes joining multiple platforms easier, we increasingly observe that participants on both sides of two-sided platforms multihome. The case of multihoming on both sides is mostly ignored in the literature on competition between two-sided platforms. We help to fill this gap by developing a model for platform competition in a differentiated setting (a Hotelling line), which is similar to other models in the literature but focuses on the case where at least some agents on each side multihome. We show that when both sides in a platform market multihome, the strategic interdependence between the two sides of the same platform will diminish or even disappear. Our analysis suggests that the common strategic advice to subsidize one side in order to maximize total profits may be limited or even incorrect when both sides multihome, which is an important caveat given the increasing prevalence of multihoming in platform markets. This paper was accepted by Joshua Gans, business strategy.

When should the offline retailer implement price matching?

In this paper, we develop a duopoly game using the Hotelling model, in which customers are uniformly distributed along the Hotelling line, and a brick-and-mortar retailer who sits on the left end of the line competes with an online retailer. The brick-and-mortar retailer is the Stackelberg leader facing strategic customers and the online retailer is the follower. Strategic customers may free ride on the BM retailer's service by first visiting the BM retailer and experiencing the product, but then switching to the online retailer to buy the product, if the retail price at the online retailer is sufficiently low. The conditions under which the BM retailer should or should not implement a price matching strategy are identified. If the cost of shopping online is high, the BM retailer can ignore the strategic customers’ behavior; there is no incentive to switch to buy the product online. When the customer's shopping cost is moderate, the BM retailer should implement a price matching strategy to prevent strategic customers from switching to the online retailer. When the cost of shopping online is low, the BM retailer should not try to match the price of the online retailer. We also show that the BM retailer's profit may increase, while the online retailer's profit may decrease, with the portion of strategic customers in the market, when the BM retailer implements a price matching strategy. When the fraction of strategic customers is sufficiently high, the BM retailer will not implement price matching strategy.

Hotelling Competition With Discrete Consumers: Comparing Equilibrium Concepts in Spatial Competition

Combining the Hotelling line with the realistic assumption that markets contain finitely many consumers, produces a model of spatial competition that does not possess a Nash equilibrium in pure strategies. This paper characterises both the ex-ante stable mixed strategy Nash equilibrium and the ex-post stable undercut-proof equilibrium for the model, and compares them with the equilibrium of the standard Hotelling model with a continuum of consumers. The mixed strategy equilibrium is unique and converges to the equilibrium of the standard model from above, indicating that the use of a continuum is a reasonable approximation of the mixed-strategy equilibrium for a market with a large number of buyers. By contrast, the undercut-proof equilibrium converges to half this level as marginal competition is more intense when the location of the point of indifference relative to the marginal consumers can be observed ex-post. Incorporating location choice into the model shows that the greater intensity of competition in the undercut-proof equilibrium, leads firms to locate closer to the centre of the line. These results provide a novel explanation for the tendency of product characteristics to converge in mature markets.

A local seller's app channel strategy concerning delivery

When a local seller launches an app channel, it can either deliver online orders itself or use a third party service. Given this background, an interesting problem is whether and how a local seller's channel strategy will be affected by these delivery options. To investigate this problem, we focus on a local seller facing these two delivery options. For each option, besides setting the online and offline prices, the seller also determines its delivery service coverage. Assuming that consumers are evenly located along an infinite Hotelling line, we propose a joint pricing and delivery distance decision model and derive the local seller's optimal decisions in two subcases, i.e. the seller is a price taker or a price setter. By analyzing and comparing the seller's optimal decisions in these situations, we find that (i) the local seller's channel strategy will be changed dramatically by the delivery option – the seller will abandon the offline channel when it delivers itself; (ii) whether the seller is a price taker or price setter will also influence the seller's channel strategy; and (iii) unexpectedly, the highly developed just-in-time logistics is an important factor that helps the offline channel and app channel coexist in the Internet era.

A dynamic pricing engine for multiple substitutable flights

As enhancements in airline IT begin to expand pricing and revenue management (RM) capabilities, airlines are starting to develop dynamic pricing engines (DPEs) to dynamically adjust the fares that would normally be offered by existing pricing and RM systems. In past work, simulations have found that DPEs can lead to revenue gains for airlines over traditional pricing and RM. However, these algorithms typically price each itinerary independently without directly considering the attributes and availability of other alternatives. In this paper, we introduce a dynamic pricing engine that simultaneously prices multiple substitutable itineraries that depart at different times. Using a Hotelling line (also called a locational choice model) to represent customer tradeoffs between departure times and price, the DPE dynamically suggests increments or decrements to the prices of pre-determined fare products as a function of booking request characteristics, departure time preferences, and the airline’s estimates of customer willingness-to-pay. Simulations in the Passenger Origin–Destination Simulator (PODS) show that simultaneous dynamic pricing can result in revenue gains of between 5 and 7% over traditional RM when used in a simple network with one airline and two flights. The heuristic produces revenue gains by stimulating new bookings, encouraging business passenger buy-up, and leading to spiral-up of forecast demand. However, simultaneous dynamic pricing produces marginal gains of less than 1% over a DPE that prices each itinerary independently. Given the complexity of specifying and implementing a simultaneous pricing model in practice, practitioners may prefer to use a flight-by-flight approach when developing DPEs.

A Note of Caution on Using Hotelling Models in Platform Markets

We study a Hotelling framework in which customers first pay a monopoly platform to enter the market before deciding between two competing services on opposite ends of a Hotelling line. This setup is common when modeling competition in Internet content provision. We find that standard taken-for-granted solution methods under full market coverage break down, and that in the unique full-coverage equilibrium, the competing service providers set substantially lower prices. Standard methods and prices are restored by giving service providers the first move.

Positioning and pricing strategies in a market with switching costs and staying costs

We analyze positioning and pricing strategies in a two-period duopoly where consumers have heterogeneous switching costs and staying costs. In the second period, we show that firms offer discounts to new customers in a market where there are more inertial consumers with large switching costs, while firms offer discounts to past customers in a market where there are more variety-seeking consumers with large staying costs. If in the second period of our model there exist both inertial consumers and variety-seeking consumers, horizontal product differentiation is minimized and both firms locate at the center of the Hotelling line market. Furthermore, when consumers are relatively sophisticated (forward-looking), behavior-based price discrimination (BBPD) hurts firms’ profits as shown in the previous literature. However, when consumers are sufficiently naive (or myopic) and do not care much about the second period when making first-period decisions, we find that BBPD can be profitable.

Retail Equilibrium with Switching Consumers in Electricity Markets

The ongoing transformations of power systems worldwide pose important challenges, both economic and technical, for their appropriate planning and operation. A key approach to improve the efficiency of these systems is through demand-side management, i.e., to promote the active involvement of consumers in the system. In particular, the current trend is to conceive systems where electricity consumers can vary their load according to real-time price incentives, offered by retailing companies. Under this setting, retail competition plays an important role as inadequate prices or services may entail consumers switching to a rival retailer. In this work we consider a game theoretical model where asymmetric retailers compete in prices to increase their profits by accounting for the utility function of consumers. Consumer preferences for retailers are uncertain and distributed within a Hotelling line. We analytically characterize the equilibrium of a retailer duopoly, establishing its existence and uniqueness conditions for a wide class of utility functions. Furthermore, sensitivities of the equilibrium prices with respect to relevant model parameters are also provided. The duopoly model is extended to a network that includes multiple retailers with capacity constraints for which we perform static and dynamic numerical simulations. Results indicate that, depending on the retailer costs, loyalty rewards and initial market shares, the resulting equilibrium can range from complete competition to one in which a retailer has a leading or even a dominant position in the market, decreasing the consumers’ utility significantly. Moreover, the retailer network configuration also plays an important role in the competitiveness of the system.

Design Outsourcing in a Differentiated Product Market: The Role of Bargaining and Scope Economies

In the electronics industry and beyond, original design manufacturers (ODMs) provide a full spectrum of services, ranging from design and development to manufacturing, to original equipment manufacturers (OEMs). Through resource pooling, ODMs benefit from scope economies when designing different products for multiple OEMs. Such design outsourcing practices, however, stir concerns that it may dilute product differentiation and subsequently intensify market competition. To examine the strategic impact of design outsourcing, we develop a game-theoretical model with a single ODM and two competing OEMs. The ODM has two divisions to serve the OEMs separately. The OEMs engage in a differentiated price competition over the Hotelling Line with product locations endogenously chosen by the parties who design the products. A wholesale-price contract is negotiated bilaterally between an ODM division and her OEM customer, and design outsourcing may reduce an OEM’s bargaining power. We compare two scenarios: (1)The ODM divisions establish dedicated resources and act as independent profit maximizers; (2)The ODM divisions cooperate through resource pooling and benefit from scope economies in both design and manufacturing. Our results highlight the role of bargaining in shaping the OEMs’ design sourcing decisions. In particular, whether the OEMs outsource design in equilibrium critically depends on the degree of asymmetry between their bargaining powers vis-a-vis the ODM. With similar bargaining power, the OEMs are more likely to outsource when they become stronger relative to the ODM. With significantly different bargaining power, surprisingly, the strong OEM tends to insource while the weak one tends to outsource. Scope economies may induce the ODM to decrease product differentiation between the products she designs for her OEM customers, and this tendency increases as the OEMs’ bargaining power strengthens. Ceding bargaining power, therefore, can be used by an OEM as an incentive lever to influence the ODM’s design decisions.

Costly location in Hotelling duopoly

We introduce a cost of location into Hotelling׳s (1929) [9] spatial duopoly model. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.

Media diversity, advertising, and adaptation of news to readers’ political preferences

In this paper, it is analyzed how advertising can affect media diversity when news firms can adapt news to readers’ political preferences. In particular, in the model news firms can choose between a single- and a multi-ideology strategy (a point on the Hotelling line and a line segment, respectively). It is shown that the size of the advertising market is determinant for the equilibrium of the news market. When the advertising market is small, news firms maximally differentiate their political offers and do not adapt news to readers’ political preferences (single-ideology strategy). When the advertising market is large, news firms minimally differentiate their political offers and do adapt news to readers’ political preferences (multi-ideology strategy).

Employee Engagement in Jamaican Hotels: Do Demographic and Organizational Characteristics Matter?

The intent of the present study was to determine the importance of demographic and organizational factors on hotel line employees’ level of engagement. Line employees (n = 290) from hotels in Jamaica participated in the study. Findings indicate significant differences between line employees’ demographic and organizational characteristics, in particular their age and department, and their level of engagement. Employees between 18 and 25 years and those 42 years and older were more engaged than those between 26 and 41 years. Employees in the accounting department were some of the least engaged when compared to employees from other departments. The findings have implications for engagement programs in Caribbean hotels, in particular when it comes to the focus and funding of these programs.

Spatial Discrimination, Nations’ Size and Transportation Costs

In this paper we develop a spatial Cournot trade model with two unequally sized countries, using the geographical interpretation of the Hotelling line. We analyse the trade and welfare effects of international trade between these two countries. The welfare analysis indicates that in this framework the large country benefits from free trade and the small country may be hurt by opening to trade. This finding is contrary to the results of Shachmurove & Spiegel (1995) as well as Tharakan & Thisse (2002), who use similar models to analyze size effects in international trade, where the small country usually gains from trade and the large country may lose.

Human resource development in the hotel industry of Mauritius: myth or reality?

The purpose of this study is to identify the role, importance and outcomes attributed to human resource development (HRD) by line managers in the Mauritian hotel industry. Data were collected through in-depth interviews from a purposive sample of 135 hotel line managers. A two-step procedure was followed to analyse data. First, thematic analysis identified key themes in the textual data. Second, the artificial neural software CATPAC was used to generate interrelationships among the themes. Results show that HRD is related to organisational success, service quality improvements, sharing of knowledge and improvements in operational efficiency. Four key outcomes of HRD were identified: improvements in staff attitude, better teamwork, enhanced productivity and better service delivery. The findings indicate the prevalence of a need-driven approach to HRD and the link between HRD and corporate strategy is not clear. Results have implications for organisational and destination competitiveness.