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The following books by Robert Paul Wolff are available on Amazon.com as e-books: KANT'S THEORY OF MENTAL ACTIVITY, THE AUTONOMY OF REASON, UNDERSTANDING MARX, UNDERSTANDING RAWLS, THE POVERTY OF LIBERALISM, A LIFE IN THE ACADEMY, MONEYBAGS MUST BE SO LUCKY, AN INTRODUCTION TO THE USE OF FORMAL METHODS IN POLITICAL PHILOSOPHY.
Now Available: Volumes I, II, III, and IV of the Collected Published and Unpublished Papers.

NOW AVAILABLE ON YOUTUBE: LECTURES ON KANT'S CRITIQUE OF PURE REASON
LECTURE ONE: https://www.youtube.com/watch?v=d__In2PQS60
LECTURE TWO: https://www.youtube.com/watch?v=Al7O2puvdDA

ALSO AVAILABLE ON YOUTUBE: LECTURES ONE THROUGH TEN ON IDEOLOGICAL CRITIQUE



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Monday, June 17, 2013

AND THEY SAY ECONOMICS HAS NOTHING USEFUL TO TEACH US


One of the more interesting out-of-the way corners of the field of Economics is what might be called the pure theory of location.   If we assume that consumers are completely rational and have perfect knowledge, that all the retail outlets selling a particular commodity offer identical instances of the commodity at the same price, and that consumers make their buying decisions solely on the basis of how close a retail outlet is to where they are [and of course that all consumers prefer the closer outlet], once one retailer has entered the field, where is the rational place for a second retailer to locate?
You might think the answer would be something like: Not too close to the first retailer, but maybe half way between that retailer and the edge of the space in which the consumers are located.  You might think that, but you would be wrong.  The correct answer is, right next door to the first retailer.

To see why this is so, consider a one-dimensional world in which everyone – retailers and consumers alike – is located somewhere along a line of finite length.  [This is of course unlikely, although not more unlikely than most of the other assumptions modern economists make, but my basic point is the same even if folks are spread out in two dimensions, such as in a city.]  The first retailer to open a shop commands the entire market.  Since there may be some distance beyond which some consumers are unwilling to travel, and assuming that consumers are distributed evenly along the line, the best place for this first retailer to locate is right in the middle of the line, the minimum average distance from a randomly chosen consumer.
A second retailer, who decides to enter into competition with the first, must locate either to the right or the left of the center of the line.  If she chooses left, she concedes all sales to consumers lying to the right of center, because she must be farther from any of them than is her competitor.  She maximizes her sales by nestling right up against the left flank of the first retailer’s shop, thereby snagging all of the business to her left.  She and her competitor then can wrangle over who gets the business of any consumers who happen to be located on the dividing line between their two shops.

I reflected on this truth this morning.  It rained cats and dogs for several hours, and when it finally let up, we went out for a walk.  We strolled up rue de la Montagne Ste. Geneviève as far as rue des Écoles, and decided to have a coffee in a café we had never before frequented.  We sat by the window, and I idly looked out the window on the street we had just walked up.  There, right next door to one another, were the only two Tibetan restaurants in the 5th arrondissement.  “Boy,” I thought, “what on earth can they be thinking, locating right next to one another.  Why doesn’t one of them move to rue St. Jacques or Place St. Michel?”  And then I remembered my elementary Economics.

7 comments:

rishimon said...

By the by, this particular location model is referred to as Hotelling's law (or Hotelling's line as it was taught to me in my undergrad). There's a bit more on it here:

http://en.wikipedia.org/wiki/Hotelling's_law

Also seems to partially explain why so many petrol (that's gasoline to you Yankees I suppose) stations cluster together...

Robert Paul Wolff said...

Marvelous! I am trying to figure out whether your internet handle means that your name is R.I. Shimon, or is a play on Rashomon. Thanks for the tip.

Typhon said...

« The only two tibetan restaurants in the 5th arrondissement. »

In the 5th arrondissement,there are at least 6 tibetan restaurants, two of which are indeed on the rue St Jacques, one at each end of this very long street.

http://www.restoaparis.com/liste-restaurant-paris/1-10--Tibetainetrad75005

I guess the high number of tibetan restaurants in this arrondissement could in itself be considered an example of the economic law you're describing. Nevertheless, I find this rather unconvincing.

Since you obviously lack data on this particular sector of the economy, you just shouldn't jump to that kind of conclusion.

Choose better examples in the future.

Robert Paul Wolff said...

Whoops. I stand corrected. My apologies. Now comes the really important question: If I go to a Tibetan restaurant, what should I order?

Matt said...

If I go to a Tibetan restaurant, what should I order?

I had grilled llama for the first time the other day. I can't say it was great, but maybe see if they have that?

I used to notice something like this when I lived in Russia, w/ old women selling sunflower seeds. They would sit right next to each other at a bus stop. No one would sit across the street. Why not sit across the street? I'd think. But in this case, I think the desire for conversation was more important than the truths of economic theory.

Robert Paul Wolff said...

Matt, I am going to assume that your comment is a witty allusion to Ogden Nash's famous verse about one-l and two-l llamas/lamas. Very cool.

Matt said...

Yes- I'm glad the reference was clear enough!