One or two years ago, a Lavazza’s take-away coffee shop opened on the side of Georgia’s east-west highway in the area of Zestaponi. You always could find plenty of coffee shops in Tbilisi, but it was a novelty to have them next to the highway. Soon afterward, another coffee bar opened along the road, and surprisingly, it was again set up close to Zestaponi. And today, there are even more takeaway coffee points along that road, and they all cluster at Zestaponi.

Traveling from Tbilisi to Kutaisi or Batumi, you will notice other such clusters. You can buy hammocks and similar handicraft stuff in various places close to Khashuri, but nowhere else. Hot and sweet bread (“Tonis Puri” and “Nazuqi”) is offered around Surami. Baskets and wooden vessels are on sale around Shrosha, and clay products in Shrosha.

Intuition suggests that the selling points for a product should be distributed evenly along the whole road. In that way, the next place to drink coffee would never be too far away. If one leaves Tbilisi and feels tired, one would not have to drive to Zestaponi for drinking a coffee.

This peculiar economic clustering is not only observable along the Georgian east-west axis. One frequently finds neighboring grocery shops and pharmacies, competing supermarket chains having their branches in the same street and petrol stations of different companies operating next to each other.

What is the economic reason for this clustering? Are vendors acting irrationally?

HOTELLING’S LINEAR CITY

The famous American economist Harold Hotelling (1895-1973) was the first to model the location decisions of sellers in his 1929 article “Stability in Competition” (Economic Journal 39 (153): 41–57). In a parsimonious but powerful model, he derived a surprising result explaining the coffee cluster around Zestaponi.

To simplify matters, Hotelling assumed that the vendors sell a homogeneous good, and they only differ with regard to their locations. As a further simplification, he assumed that the location will be chosen along a line (instead of a plane, as in reality). The citizens of his “linear city” are somehow distributed along the line, and they always buy at the nearest shop. Where would vendors, he asks, establish their stores?

As it turns out, in any equilibrium one will find clusters of vendors. Consider the simplest case of two sellers. If seller A is located to the left of seller B, then seller A will attract all the customers who are living to the left of A, while seller B will get everybody living to the right of B. How about the customers living between A and B? Well, those who are closer to A will buy from A, those closer to B from vendor B. Hence, the equidistance point between A and B divides the customers who buy at A from those who buy at B; all customers to the left of this point will buy from A, and those to the right of that point will buy from B. Can this situation constitute an equilibrium?

Assume that seller A would decide to move rightwards, closer to seller B. Then the equidistance point between A and B would also move to the right. So, there will be more people to the left of that point, and A will have more customers than before. In the same way, vendor B has an incentive to move leftwards.

So, whenever there is a positive distance between the two vendors, both of them have incentives to change their locations. By this argument, in any equilibrium with two sellers, there can be no distance between them, and they must be located at the same point on the line.

POLITICAL LOCATION

Hotelling’s model has another application. Ever since the French Revolution, it is common to categorize political standpoints on a left-to-right scale. This reflects the seating plan in the national assembly of 1789, where the supporters of the Ancien Régime sat right, while the revolutionaries sat left.

In his 1948 paper "On the Rationale of Group Decision-making" (Journal of Political Economy 56: 23–34) the Scottish Economist Duncan Black (1908-1991) proposed a model that represents the political spectrum as a line. Like in the linear city, citizens are distributed along this line according to their political views, and each of them votes for the candidate whose political position is closest to their own. But who are the vendors?

One might think that in a democracy, politicians try to foster their fundamental principles and convictions in the political process. In this view, a socialist holds her views because she cares about the well-being of the poorer classes, while a conservative is concerned about the traditional values of the society. Yet perhaps there are more prosaic reasons why politicians adopt certain positions. What if they are in fact indifferent about the political views they represent as long as these gain them political power? In Black’s model, political candidates do not care about left or right – they just want to get elected with any political agenda allowing them to accumulate votes.

According to Black, political candidates are like the vendors on the Tbilisi-Batumi highway. They want to sell something to the people – not coffee, but political messages. As payment, they accept the votes of the citizens they address. While an ordinary vendor wants to maximize the number of customers by choosing a geographical location, a political entrepreneur aims to maximize the number of votes he or she receives by selecting a political position.

Like in the linear city, also this model predicts that the equilibrium will be characterized by clusters. If there is a two-party system as in the United States (Democrats vs. Republicans), in the United Kingdom (Tories vs. Labour), and perhaps in Georgia (UNM vs. Georgian Dream), both parties will try to get programmatically as close as possible to one another. Empirically, this is something that was observed in many countries.

For example, the German conservatives (CDU) under Angela Merkel took over almost the entire agenda of the political left: they expanded the social welfare state, terminated nuclear energy, and introduced gay marriage, to name just a few things one would not expect to be on a conservative agenda. This strategy turned out to be extremely successful for the conservatives. Everybody with views to the right of the CDU had to vote for them anyway, due to a lack of alternatives, while just a little space remained to the left of the CDU. Those very left votes not acquired by the CDU were shared between the Social Democrats, the Socialists, and the Green Party. So, through a good understanding of Black’s model, and by abandoning all their political convictions, the 2013 national elections brought about the best result for the conservatives for more than 20 years.

In Georgia, we see fierce opposition between the UNM and the Georgian Dream. As time progresses, however, we can expect that the political positions of the two parties will converge. Given the wild slanders and personal attacks that characterize Georgian politics, that might be a desirable development.