Why do competitors open their stores next to one another? – Jac de Haan

Why do competitors open their stores next to one another? – Jac de Haan

Translator: tom carter
Reviewer: Bedirhan Cinar Why are gas stations always built
right next to other gas stations? Why can I drive for a mile
without finding a coffee shop and then stumble
across three on the same corner? Why do grocery stores,
auto repair shops and restaurants always seem to exist in groups instead of being spread evenly
throughout a community? While there are several factors that might go into deciding
where to place your business, clusters of similar companies can
be explained by a very simple story called Hotelling’s Model
of Spatial Competition. Imagine that you sell
ice cream at the beach. Your beach is one mile long
and you have no competition. Where would you place your cart
in order to sell the most product? In the middle. The one-half-mile walk may
be too far for some people at each end of the beach, but your cart serves
as many people as possible. One day you show up at work just as your cousin Teddy
is arriving at the beach with his own ice cream cart. In fact, he’s selling exactly the same type
of ice cream as you are. You agree that you will split
the beach in half. In order to ensure that customers
don’t have to walk too far you set up your cart a quarter mile
south of the beach center, right in the middle of your territory. Teddy sets up a quarter mile
north of the center, in the middle of Teddy territory. With this agreement, everyone south
of you buys ice cream from you. Everyone north of Teddy buys from him,
and the 50% of beachgoers in between walk to the closest cart. No one walks
more than a quarter of a mile, and both vendors sell
to half of the beachgoers. Game theorists consider
this a socially optimal solution. It minimizes the maximum number
of steps any visitor must take in order to reach an ice cream cart. The next day, when you arrive at work, Teddy has set up his cart
in the middle of the beach. You return to your location
a quarter mile south of center and get the 25% of customers
to the south of you. Teddy still gets all of the customers
north in Teddy territory, but now you split the 25% of people
in between the two carts. Day three of the ice cream wars,
you get to the beach early, and set up right in the center
of Teddy territory, assuming you’ll serve
the 75% of beachgoers to your south, leaving your cousin to sell
to the 25% of customers to the north. When Teddy arrives,
he sets up just south of you stealing all of the southerly customers, and leaving you with a small group
of people to the north. Not to be outdone, you move 10 paces
south of Teddy to regain your customers. When you take a mid-day break,
Teddy shuffles 10 paces south of you, and again, steals back all the customers
to the far end of the beach. Throughout the course of the day, both of you continue
to periodically move south towards the bulk of the ice cream buyers, until both of you eventually end up
at the center of the beach, back to back, each serving 50%
of the ice-cream-hungry beachgoers. At this point, you
and your competitive cousin have reached what game theorists
call a Nash Equilibrium – the point where neither of you
can improve your position by deviating from your current strategy. Your original strategy, where you were each a quarter mile
from the middle of the beach, didn’t last, because it wasn’t
a Nash Equilibrium. Either of you could move your cart
towards the other to sell more ice cream. With both of you now
in the center of the beach, you can’t reposition your cart
closer to your furthest customers without making your current
customers worse off. However, you no longer have
a socially optimal solution, since customers at either end of the beach have to walk further than necessary
to get a sweet treat. Think about all the fast food chains, clothing boutiques,
or mobile phone kiosks at the mall. Customers may be better served by distributing services
throughout a community, but this leaves businesses vulnerable
to aggressive competition. In the real world, customers come
from more than one direction, and businesses are free to compete
with marketing strategies, by differentiating their product line,
and with price cuts, but at the heart of their strategy, companies like to keep their competition
as close as possible.

100 thoughts on “Why do competitors open their stores next to one another? – Jac de Haan

  1. I like how I sell Ed-Bars and my "cousin" sells Ted-Bars and this video is owned by the TedEd channel. I'm not sure if this is considered as a pun but I'm just saying…

  2. and its actually good for costumer because you can see which business is better without walking too much and you can get lower price for something

  3. It is much easier to understand the benefit of clustering if you think of "choices". Imagine a food court. Each vendor differentiates by selling a special menu catering to different tastes, but they all benefit from the central location and common facilities like restrooms. They can also minimize advertising costs. Hence, vendors are all better off despite the close competition nearby.

  4. This theory is wrong; first, a person open up a hotel in a remote location and it is a hit, rest of the competitors just open a hotel next to it by stealing some customers who are on waiting to dine. After some time that location becomes a food destination because of copy paste effect.

  5. I send teddy to jail.
    How? You ask
    Unfair competition

    Unfair competition is essentially a deceptive or wrongful business practice that economically harms either consumers or business entities. At its core, unfair competition is a business tort designed to stop any unfair practices that might be happening in the context of a business setting. Federal and state laws are designed to protect the economic, intellectual, and creative investments made by businesses in distinguishing themselves and their products.

  6. This is bad information. Actually it is smarter to place the produce base on the customer needs. That's how they o it actually. There is no such thing as "Middle".

  7. I think that it's the "location" itself and its suitability that pulls the competitors toward it rather than the competitors themselves determaining where the business should be.

  8. In conclusion, one can say it's the insecurity of the owner to see another owner sell more to the point they tie each other where both can no longer feel insecure of letting the other sell more?

    I see.

  9. Agglomerationion
    Hoteling model of special competition
    Socially optimal solution
    Nash equilibrium
    No one will improve in the current situation due to not abiding in pre strategy both agreed upon

    You van sell product with discount and showing how it is better than other product …but still you will keep youe cart or mart closer to yoir competitor…

  10. One possibility is that the customers need to compare among different shops before decision. Thus gathering together makes customers more likely to decide and purchase immediately, instead of going anywhere else.

  11. So the town I'm in basically has a U shaped business district thats about 15 miles long. 5 mile West side is mostly big box, hardware, chain stores in mini malls, and car repair. 5 mile North section is locally owned small businesses, gas stations, grocery, and several fast food and then some long stay local hotels. There is a 2 mile gap starting after you turn East. Then several gas stations, couple fast food, grocery, banking. Heading further East or South is pretty much nothing. North and West is a larger city about 5 miles away. The middle of the U is basically residential.

    A mall was built in the middle of the U about 1980 and never succeeded. Pretty much no other businesses are in the middle. I live in the middle and when I need something, I usually go East/North or West depending on what I need.

    Walgreens is pretty much in the middle of the West stretch. About 5 years a CVS came to the Area. they set up shop about a half mile away. Parking lot is usually mostly empty. Hours were cut way back from 24 hours.

    The above example sort of fails around here. Its like both of the ice cream stands were near one edge of the beach. other side of the beach is a hot dog/popcorn stand that sells some ice cream. I feel CVS should have set up on the East side as their only competitor there is the grocery store that sells some health& Beauty. Where they set up they have Walgreens a half mile away and Walmart 1.5 miles away. They could have mostly cornered the market on the east end, but they let the grocery store have it. Instead they set up shop in a crowded market that wasn't really interested in a new store that was basically the same as the current one.

    If I'm shopping on East end and need shampoo, I'll just get it at the grocery store. West side, probably just get it at Walgreens.

  12. This makes no sense ( except if you have icecream cart ) – 1. Shops dont have wheels and can not be moved on the whim. 2. Shops do not sell 100% same item ( although they are competing )

  13. Why is nobody talking about the people at the beach having 2 little dots as eyes and no mouths. But it’s clearly normal that people have normal mouths and eyes so… are these people aliens?

  14. Good one, there is also the "Place selection", for example, the last trend talks about the beauty of being under the third plant of the beaches…the One that will be under the third plant of the beaches will take the audience easily, the interest is about being under this plant(and he wants the money now because he has a cancer and will be dead Tomorrow), while the competitors plan to be under the second plant because they calculated that the next trend will favourite them(Maybe because they forecast that a micro-asteroide will destroy the third plant (there are no plants After the third that Can take the third Place), and they know that people will prefer the second plant because they will be nostalgic about the third destroyed, Knowing that the next season will have more people going to the beach), and for them the best situation will be to built the shop under the second plant.

    This is an example of the enormous quantity of forces that take place

  15. Or what one of them can do is buy another ice cream cart, hire another worker and then set up two locations. Or one of them makes more unique ice cream than the other person.

  16. Lets not forget zoning laws, and idea of malls. Socially optimal would be king, if capitalism wasnt to the end all of western civilization ideologies where money is king. Sure the investors are happy but in the long run we all suffer.

  17. It was more like that you explained how to share a potential market lot more than explaining why the competitors are opening next door to each other … let’s say 5 restaurants in the same street

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