Herding versus Hotelling: Market Entry with Costly Information

37 Pages Posted: 19 May 2008 Last revised: 9 Jan 2009

See all articles by David B. Ridley

David B. Ridley

Duke University - Fuqua School of Business

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Abstract

Why do businesses such as fast-food restaurants, coffee shops, and hotels cluster? In the classic analysis of Hotelling, firms cluster to attract consumers who have travel costs. We present an alternative model where firms cluster because one firm is free riding on another firm's information about market demand. One consequence of this free riding is that an informed firm might forego a market that it knows to be profitable. Furthermore, an uninformed firm might earn higher profits when research costs are high, because it can credibly commit to ignorance.

Keywords: agglomeration, herding, Hotelling, information

JEL Classification: L13, D83

Suggested Citation

Ridley, David B., Herding versus Hotelling: Market Entry with Costly Information. Journal of Economics and Management Strategy, 2008. Available at SSRN: https://ssrn.com/abstract=1131743

David B. Ridley (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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