Expert View: Tories beaten on the beaches

The real difficulties faced by the Conservatives have nothing to do with the travails of their leader, which have occupied so many column inches recently. Theirs is a serious problem of market positioning, as revealed by economic analysis.

Imagine a beach, on which there are two competing ice-cream sellers. Where should they stand? If the objective is to minimise the distance all the people on the beach have to walk in order to buy an ice-cream, the answer is that each should stand in the middle of his half of the beach. That is the socially optimal outcome.

Unfortunately, competition between the two delivers a different result. The ice-cream seller on the left side of the beach discovers that if he moves a short distance towards the centre, he still gets the business of all those to the left but picks up more of the trade of those on his right. His rival quickly notices the loss of business, and responds by moving towards the centre - for the same reasons. He still gets the business of those on his right, but has now won back the customers taken by the first ice-cream seller's move.

Clearly, as long as either remains in his half of the beach, he is vulnerable to a raid from the ice-cream seller on the other side. The only safe place to stand, even though it is not socially optimal, is in the middle of the beach. So that is where the vendors end up.

This analysis, by an economist called Harold Hotelling, is a powerful metaphor which helps us to understand the behaviour of producers in a wide variety of markets. Producers want to position their goods at the point where the greatest number of people are likely to buy.

This is not just a matter of location in physical space; it applies equally to product space. If there are four manufacturers of cars, we would like them all to produce different models to give us maximum choice. But if one manufacturer discovers that vehicles of a particular shape sell well, you can be sure competitors will copy it. So car producers tend to cluster, just like the ice-cream sellers, around the popular shapes.

Similarly, if there are three airlines serving a particular destination, you would hope they would put on flights at times spread evenly throughout the day. But we all know that doesn't happen. The airlines all schedule their flights, very close together, at the most popular times of day.

The analysis can be extended to political parties, though the parties have not always behaved in the way envisaged by Mr Hotelling. The reason is that their policies have not only to appeal to the voters but to inspire the party faithful, and this is a difficult trade-off. In the early 1980s under Michael Foot, the Labour Party took up a position close to the left-hand limit of the beach. The party faithful loved him, but Margaret Thatcher won the election, even though she set out her stall well to the right of her half of the beach.

One consequence of this may be that many of the Conservative faithful still assume elections can be won from a stall set out in the same position. But that is no longer possible. The Conservative Party today faces a Labour Party that, like the American Democrats, has used modern marketing techniques (including focus groups) to develop policies designed to appeal to the voters in the middle of the beach.

And here is a final twist. What does an ice-cream seller do when he is competing not with one other but with two, who work in tandem and pool their profits? That is not a bad analogy for the problem faced by the Conservatives today: a large part of the beach is covered by Tony Blair and Gordon Brown, and the Conservatives do not have a mechanism for electing two leaders.