Not to be confused with Hotelling’s Theory, Lemma, or T-Squared Distribution, Hotelling’s Law represents statistician and economic theorist Harold Hotelling’s effort to explain why competitors tend to imitate each other, despite there being benefits to aiming for more differentiation.
Said another way, while it may be more profitable for a restaurant to offer a wildly different menu than its nearest competitor, in some cases that restaurant will actually become more like their competitor over time, instead. And this can be true of their product and service offerings, but also things like their branding and location.
This “law” is also sometimes called the Principle of Minimum Differentiation, and it doesn’t just apply to businesses (though that’s where it’s most frequently leveraged), it’s also sometimes used to explain why major political parties tend to become more like each other over time, rather than spreading out to the fringes as one might expect in an ideological marketplace where it seems like becoming more unique than one’s opponent might be beneficial (if one becomes more unique in a direction their constituents support, at least).
The crux of Hotelling’s argument is that while a restaurant carving out its own niche, cornering a relatively small market, and then holding that market may bear immediate fruit, by retreating from the perceptual center—the average good or service or location or ideological offering in their space—they risk ceding that larger, mainstream customer base (or population of supporters) to their competition.
So while becoming more unique and fringy might allow a restaurant to absolutely dominate the relatively small customer base that wants (for instance) pickled radish burgers, if they pivot toward pickled radish burgers they allow their competition to own the (probably larger) customer base that wants a more conventional hamburger, fries, and milkshake.
If their competition claims that middle, they get the whole of a customer base the two restaurants otherwise would have shared, leaving the pickled burger place with only their small (if loyal) audience.
Had the pickled burger restaurant stayed “average” and less focused, however, they could have taken half that larger cluster of customers, and that (in many cases at least) will be more lucrative than claiming a smaller, more dedicated demographic.
This tendency can be seen in politics, as well, as though primary elections in places like the US can get pretty fringy when candidates are talking to their base, as soon as the primaries are done and candidates start talking to everyone, to the whole of the country, not just their ideological die-hards, their policies tend to reorient toward the middle because remaining on an extreme end of the spectrum leaves them prone to a huge loss if their competition manages to claim that much larger (if less die-hard) middle.
This can be seen in individual elections, but it’s also thought, by some political theorists at least, to be part of why the major, regularly winning parties in many democracies become pretty similar over time, differing on a few hot-button topics, but otherwise being essentially the same on the vast majority of issues that (consequently) are discussed less, despite arguably being vitally important.