Why do competitors open their stores next to each other?

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By Arnab Ray

Have you ever wondered why competing businesses choose to open their stores right next to each other? It’s a curious phenomenon that defies conventional wisdom. Why wouldn’t a store want to distance itself from its competition to attract more customers? The answer lies in the intricate world of Game Theory, specifically a concept known as the Nash Equilibrium. In this comprehensive article, we will explore the reasoning behind competitors opening stores next to each other, unravel the principles of game theory, and delve into the insights this strategy offers for businesses.

Understanding the Nash Equilibrium:

To grasp the concept, let’s embark on an imaginary journey to a picturesque beach with two ice cream sellers, Seller A and Seller B. Both sellers aim to maximize their ice cream sales. Initially, they set up their stalls at opposite ends of the beach, each capturing roughly 50% of the beach-goers. A fair split, one might say.

However, Seller B desires a larger share of the customers. On the second day, Seller B strategically moves their stall to the middle of the beach, attracting approximately 62.5% of the beach-goers. This leaves Seller A with only 37.5% of the customers.

Witnessing this shift, Seller A quickly adapts and moves their stall to the middle of the beach on the third day. Now, both sellers find themselves back to a 50/50 split of the customers. Neither can move without risking a loss in customers to the other. This state of equilibrium, where no player can improve their position unilaterally, is known as the Nash Equilibrium.

The Nash Equilibrium in Real-World Business:

The Nash Equilibrium extends beyond ice cream sellers on a beach. It explains the rationale behind real shops, restaurants, petrol stations, and various other businesses setting up next to their competitors. Being in close proximity to competitors increases the potential customer pool, and moving away could mean losing out on valuable foot traffic.

One classic example is Best Buy strategically positioning their stores near Staples and Circuit City locations. By offering a superior customer experience, Best Buy leveraged their competitive advantage and successfully captured market share from their rivals. The proximity to competitors allowed them to tap into an existing customer base while benefiting from the marketing efforts of their rivals.

The Benefits of Clustering:

Clustering, the term used to describe the phenomenon of competing businesses locating their stores close to each other, offers several advantages. Firstly, it promotes shared marketing benefits. By having multiple stores in the same vicinity, businesses can collectively attract more customers and benefit from the overall increased foot traffic.

Secondly, clustering also creates a sense of convenience for consumers. In many parts of the world, including the United States, retail, commercial, and residential areas are distinctly separated. As a result, people often rely heavily on automobile transportation to fulfill their everyday needs. By having stores clustered together, customers can conduct multiple errands in one area, saving time and effort.

Unveiling the Nash Equilibrium in Action:

The Nash Equilibrium’s strategic implications become evident when examining the behavior of competing businesses. Suppose we consider a small town with a main highway passing through it. A lemonade stand opens at one end of the town to capture traffic passing through. It quickly gains success. Soon, another lemonade stand opens at the other end, targeting the traffic flow and the residential neighborhood in between.

Observing the situation, the first lemonade stand decides to move closer to the middle of the town to capture both highway traffic and local customers. In response, the second lemonade stand also relocates to the midpoint. Now, the town boasts two successful lemonade stands next to each other, capturing both local and highway traffic.

Despite being direct competitors, both lemonade stands adhere to the same pattern of behavior, knowing that any deviation would result in a loss of market share. This is a prime example of the Nash equilibrium at play, where each competitor’s optimal location is reached to maximize their potential customer base.

Factors Influencing Clustering:

Besides the Nash Equilibrium, other factors contribute to clustering. Zoning laws, particularly prevalent in the United States, segregate commercial, retail, and residential spaces. This separation necessitates businesses to operate in designated retail areas, increasing the chances of locating near competitors.

Moreover, consumer convenience plays a significant role. As people tend to favor convenience and aim to conduct multiple tasks in one trip, having stores in close proximity simplifies their shopping experience. This trend has also driven innovations in the delivery services industry, such as curbside pickups and same-day home deliveries, catering to the demands of convenience-seeking customers.

Conclusion:

The strategy of competitors opening stores next to each other might initially seem counterintuitive, but it is rooted in the principles of Game Theory, specifically the Nash Equilibrium. Through strategic positioning, businesses can tap into shared marketing benefits, cater to consumer convenience, and maximize their market share. By understanding the dynamics behind clustering, businesses can make informed decisions and thrive in competitive landscapes. So, the next time you come across two competing stores side by side, remember that it’s not mere coincidence but a strategic move driven by game theory principles and the pursuit of business success.

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