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Hotelling’s Law

Posted on November 29th, 2012 by Jenny Frankel

Later this year, Americans will be voting for a new president. Before this happens though, the two candidates will have several televised debates where they will outline their positions on all sorts of topics, including economics. Is government too big, or too small? What programs should receive spending cuts, which should be getting more money? How much is too much to spend on foreign conflicts? Because politicians have so much to say about economics, I thought it might be interesting to see what economics has to say about them.

One way to do this is to use Hotelling’s law. This economic law, also known as principal of minimum differentiation, describes the tendency of competing companies to produce products which are similar to one another, rather than different. Imagine two competing soda companies who both only offer the same flavor. One company, in an attempt to capture more of the market, might decide to add cherry flavoring to their soda. To combat this, the other company will likely innovate in a very similar way, such as creating their version of the cherry soda. This is because creating a different flavor can be more risky than creating a product that can directly compete. It might seem like an obvious rule, but it has some far reaching implications.

For example, one can apply Hotelling’s law to politics. To do so, you have to see the voters as the market and the candidates as the products. After primaries, each candidate usually has the majority support of his or her’s party. The people who are up for grabs tend to be the independents, and this is who politicians usually need to win the election. Because both candidates are vying for the same “market” of voters, they tend to shift, sometimes dramatically, to the middle of the political spectrum (this is sometimes called the “rush to the middle”). When they do this, some argue that the politicians become much more alike. Rather than accentuating their differences, in other words, they both move closer together.

So next time you are watching the US primaries and realize that a politician has changed certain views after the primaries, you’ll know it’s just an instance of Hotelling’s law in action. And if this article, or economics in general, is interesting to you, you may want to begin the application process for an economics degree. The degree is worthwhile not just in the job opportunities it provides, but also with the new ways you will be able to view the world.

Written by Jenny Frankel

Jennifer is the Director of Financial Services at Envisage International. Jennifer is a graduate of the University of Florida where she holds a Masters in International Business and a Bachelors of Science in Business Administration. She has lived and worked abroad in Chile, Costa Rica and London, and traveled extensively in South America, Europe and Asia.

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