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"Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. This is also referred to as the principle of minimum differentiation as well as Hotelling's "linear city model".
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Another example of the law in action or practice is to think of two food push-carts at a beach. Assume one starts at the south end of the beach and one starts at the north. Again assuming a rational consumer and equal distribution along the beach, each cart will get 50% of the customers, divided along an invisible line equidistant from the carts. But, each cart owner will be tempted to push his cart slightly towards the other, in order to move the invisible line so that it encompasses more than 50% of the beach. Eventually, the push cart operators end up next to each other in the center of the beach.
Obviously, it would be more socially beneficial if the shops separated themselves and moved to one quarter of the way along the street from each end — each would still draw half of the customers (the northern or southern half) and the customers would enjoy a shorter travel distance. However, neither shop would be willing to do this independently, as it would then allow the other shop to relocate and capture more than half the market.
The street is a metaphor for product differentiation; in the specific case of a street, the stores differentiate themselves from each other by location. The example can be generalized to all other types of horizontal product differentiation in almost any product characteristic, such as sweetness, colour, or size. The above case where the two stores are side by side would translate into products that are identical to each other.
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