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Berkowitch – Modifying and Applying Hotelling’s Model to the Short-Term Rental Market

 

Modifying and Applying Hotelling's Model to the Short-Term Rental Market (2024)

Undergraduate: Evan Berkowitch


Faculty Advisor: Jacob Kohlhepp
Department: Economics

Standard spatial competition models do not consider an agglomeration effect, a consumer’s preference for competing firms to locate near each other. I modify the canonical Hotelling model by adding an agglomeration force and considering quadratic transportation costs. This agglomeration effect posits that consumers derive more utility when firms are located close together. I derive the optimal distance between firms depending on the strength of the agglomeration force relative to the transportation costs. Through data on Airbnb listings, points of wedding venues and transit stops, I develop a regression model to approximate the pairwise firm distance in Boston and San Francisco. I find that Boston’s Airbnb listings follow the prediction of the modified Hotelling Model while San Francisco’s do not exhibit evidence of an agglomeration force. Based on the interaction terms, I find a higher relative strength of the agglomeration effect compared to transportation cost.