Hotelling’s Game, or Why Gas Stations Have Competitors Nearby (2008)

The model seems incorrect:<p>1) It misses pricing. If I am next to another gas station or hot dog stand, I have competitive pressure; my best strategy is to price just below the competitor. If I am isolated, I can jack up prices by however much people are willing to spend to not go further.<p>2) It also assumes just two players on a beach. With more players and a longer beach, you end up with everyone spread out. With three players, the two outer players will continue to move in towards the center player. If the center player ever has less than 1&#x2F;4 of the beach, they&#x27;ll want to move to just outside one of the other two players, who will then want to move to the center.

What I&#x27;d also like to know is why a cluster of gas stations ends up with different prices. If you have a competitor next door advertising gas at, say, $3.95 per gallon, why would you put up a giant sign saying yours cost $4.05?<p>Even more baffling, as a customer, why would you go to the more expensive pumps? Sure, loyalty discounts might account for a certain number of decisions, but that can&#x27;t be the only answer. I&#x27;ve often wanted to go up to someone pumping gas at a higher price when there&#x27;s a cheaper station right next door, and just ask them how they decided to pay more.

It&#x27;s very interesting seeing an article on HN about this. Before my current job, I worked as a data scientist at one of the largest travel centers in the U.S., and we analyzed this problem almost nonstop with regard to both gas and diesel prices. A good pricing strategy is quite complex, and you&#x27;d be surprised at the number of factors that goes into it.

This makes sense, but it&#x27;s very unfortunate. In Utah there are quite a few small communities that have no services at all so you have to drive maybe 20 to 30 minutes for the closest anything. Needless to say this sucks. In the rare event that a small town has only <i>one</i> station it is virtually guaranteed to have extremely high prices (with one exception that I know of). It&#x27;s one of the reasons why even tho I prefer a more rural place to live, I opt to live closer to the big city instead. We are getting to a point where the opportunities and conveniences of the big city are making small town life much more difficult (in contrast) and expensive. You have to forgo many conveniences. Perhaps things will change in the future, but that is definitely not the current trend.

I don&#x27;t drive a car nor buy hot-dogs but what struck me as a convincing and important example is how all news-stations play the same news. And not only that but they also much broadcast at the same time.

The Gas Station&#x27;s game doesn&#x27;t seem to correlate well with the game suggested with the Hot Dog stand analogy. Setting up gas stations is expensive and requires a lot of infrastructure setup and time, once set up people just can&#x27;t move it around in a city. Now if I were setting a new gas station I would place it in a location where I win greater market share and is disadvantaged to the competitor. Due to the resource constraints, the competitor has to just stay where they were. Gas station locations don&#x27;t lie in efficient markets where the equilibrium is achieved by being close to each other.

Another way of thinking about it; when you&#x27;ve been on the highway and see gas, and pull off the highway, and there&#x27;s a sign &quot;1 gas station left&quot; and &quot;3 gas stations right&quot;, you almost always go right. You probably try to go to the first station, but if you pass it, you go to the second station. Each one tries to be the &quot;first&quot; station there, but only one can be first, and the real estate costs for gas-stationed zoned properties probably go up for the closest one.

A discussion from 2011: <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=2814864" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=2814864</a>.

This article is writing as if this is a growth business, we are a century in and it is more a game of musical chairs, so it is a question of where the survivors are located, not where new entrants start.<p>There used to be petrol stations everywhere, it was the hot new product to sell once upon a time and every garage would want to have a forecourt. The infrastructure needed then wasn&#x27;t that much more sophisticated than that needed for a lemonade stand. You could just put the sign up and profit from the passing trade very much on a know-the-customer-personally basis. No upsells were needed, it was an easy way to print money.<p>Then the market got saturated. Much like mobile phone shops, suddenly small towns had half a dozen of them.<p>Then this business got picked off by the supermarkets in European markets. They sold own brand petrol at first at a better price than the established brands. The brand did not matter as it is a commodity product. They did not have to make money off it as they were luring customers in for their big shop.<p>After this round of musical chairs only supermarkets, convenience stores and motorway service stations survived.<p>I think it has been a cruel business and it is quite sad that something so valuable has no return in it for the end retailer.

This is a powerful example but for some reason it never dives into what happens when the 3rd stand appears :D

Explains why political primaries tend to skew so far left or right, and yet when the final election comes, the candidates race towards the middle while framing their opponents as extremists.

Another factor: commercial use and potential hazard zoning. Cities may disallow gas stations in large areas.

Zoning is a giant factor in clustering of gas stations in populated areas, link below an example.<p><a href="https:&#x2F;&#x2F;www.apnews.com&#x2F;7bf2dceaacfc48178535dfc56d5cdbf3" rel="nofollow">https:&#x2F;&#x2F;www.apnews.com&#x2F;7bf2dceaacfc48178535dfc56d5cdbf3</a>

In economics, this is called clustering. Malls and shopping streets are a good example, but also the NYC Diamond District, Las Vegas, and Silicon Valley.

What happens in the repeated game? Seems more applicable to the current problem.

Reminds me of my own observation in the US ( 2001 ) : car dealers concentrate.

&gt; If voters pick the candidate closer to their views, and voters are spread out across the spectrum, then both candidates would converge to the middle. It’s no surprise that politicians seek the “average vote.” It also suggests why it’s so hard to tell the difference between candidates during the campaign trail.<p>Needs a (2008)...