Why do Burger King and McDonald’s offer indistinguishable chicken salads—often right across the street from each other? Why do Home Depot and Lowe’s outlets huddle near each other like lovelorn teenagers? Why is Coke so much like Pepsi?
They’re just obeying Hotelling’s Law. Stanford University economist Harold Hotelling posited back in 1929 that rival sellers tend to gravitate toward each other—in location, price, and product offerings—because otherwise they risk losing some of the broad mainstream of customers. In other words, if your competitor has found something that sells or a way to sell it, the easiest way to horn in on their market share is to sell the same thing in the same way.
His insight, also known as the “principle of minimum differentiation,” is still widely used by economists and often applied to politics: candidates leaning too far left or right risk losing the essential moderate vote, so both Republicans and Democrats are pulled to centrist positions.
This phenomenon, as Hotelling himself pointed out, may help sellers keep up with their competitors, but it’s not always a good thing for the general public. It means many customers have to travel farther to buy a product than they would if the stores selling it were more spread out. The law also means that products all start to look the same.
“Our cities,” complained Hotelling, “become uneconomically large and the business districts within them too concentrated. Methodist and Presbyterian churches are too much alike; cider is too homogenous.”
Okay, so his examples could use an update. But considering this was years before the first suburban big-box mall opened, it’s some pretty prescient analysis.
