As shown later under the geographic results, it emerges that certain centers seem to cluster near to each other, I further researched to identify why this might be the case. Hotelling’s Law might be appropriate to explain the market structure phenomenon. It states that there is an ‘undue tendency for competitors to imitate each other in quality of goods, in location, and in other essential ways’ (Hotelling, 1929, p. 41).
Hotelling’s law is considered the opposite of product differentiation and is an observation that states firms in many markets usually locate close together and produce their goods and serviceswith minimal differentiation (Ahlin & Ahlin, 2013). In Hotelling’s Law, the assumption is that two competing firms each locate at one end of the same street and sell identical products, with same pricing and customers evenly dispersed. Since everything is homogenous, convenience will become the only factor that which firm will attract the most customers. Hence, both firms will move closer to the midpoint of the street to maximize the amount of customers they can attract and eventually both firms will be located in the midpoint of the street with high proximity and having customers evenly dispersed again (Ridley, 2012). This is where the Nash Equilibrium is achieved. Nash Equilibrium occurs when no participant can gain advantage by a unilateral change of strategy if the strategies of the others remain unchanged (Chang, 2015).
Seemingly Hotelling’s Law illustrates a perfect competitive market, meaning if one firm increases the price of its products, the other firm will capture the entire market. However in reality, this is not the case as Hotelling stated that ‘some buy from one seller, some from another, in spite of moderate differences of price’ (Hotelling, 1929, p. 41). This is further supported when firms actually differentiate their products to reduce the intensity of price competition “retailers with greater ability to differentiate their products are more likely to strategically cluster.” (Picone, Ridley, & Zandbergen, 2009, p. 1) Showing the nature of an oligopolistic market (Weyl, 2011).
Operating as an oligopolistic market suggests that firms might collude. Any forms of collusive behavior in a market could be at risk of being prosecuted under the Competition Ordinance (Competition Commission, 2015, p.
Competition Ordinance: Where the Commission considers collusion in contravention of the First Conduct Rule has occurred, they will take action against undertakings that engaged in collusion (Competition Commission, 2015, p. 4). The First Conduct Rule prohibits businesses from making any decisions that the effect is to harm competition in Hong Kong (Competition Commission, 2015).