The curious case of Hotelling’s location model

In 1929, Harold Hotelling published what was to become a highly influential paper in economics: Stability in Competition, in which he presented a simple model of competition between two sellers selling an identical product in a linear and bounded market.

Hotelling’s model sparked the development of a large literature on spatial competition and product differentiation, inspired the development of spatial models of political competition, and became an indispensable part of economics teaching. Nevertheless, the early reception of Hotelling’s model was not as positive as one might expect. Its early reviewers thought that the model was logically flawed, highly unrealistic, and very sensitive to changes in its assumptions. In fact, 50 years after the publication of Hotelling’s article, the scholars demonstrated the invalidity of his results.

There is a striking contrast between the significance of Hotelling’s contribution to modern industrial economics and the fact that his original model was logically flawed, highly unrealistic and non-robust. Common sense suggests that a model with these characteristics cannot be explanatory. This view is generally supported by philosophical accounts of models that regard the logical validity, representational adequacy, and robustness of a model as determinants of its explana- tory value. If one adopts this view, it is hard to make sense of the explanatory value of Hotelling’s model and its significance in industrial economics.

In a recently published paper, using Hotelling’s model as our case, we argue that there is more to the explanatoriness of a model than its logical validity, realisticness and robustness. Our argument is methodological, but it utilizes the history of economic thought and emphasizes its importance for economic methodology.

Our analysis illustrates why the history of economics is essential to our understanding of modern economics: even a little bit of historical context, which includes information about the intended use of a model, its reception and the state of knowledge at the time, significantly improves one’s understanding of a model.

The reference of the article is given below:

Aydınonat, N. E. & Köksal, E. (2019). Explanatory Value in Context: The Curious Case of Hotelling’s Location Model. The European Journal of the History of Economic Thought.

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