Why do similar shops always launch right next to each other?
Were you ever driving, desperately looking for a café or a convenience store, and only tens of miles later, you find 4 or 5 different ones standing exactly right next to each other? Have you ever taken a restaurant recommendation from a friend, but after reaching the location, you find the whole street beaded with great places that you just get overwhelmed to decide? Theoretically, wouldn't these brands achieve better success if they were equally scattered around the area, each being more conveniently available for more customers with the relatively lower competition? However, companies chose their locations only after careful study, and this phenomenon is certainly intentional and explainable by the Model of Spatial Competition.
To explain this theory, a simple hypothetical scenario will be proposed. Imagine you decided on a particular summer day to sell ice cream on the local beach. When you arrive, you don't find anyone selling ice cream other than you. So, you strategically decide to set up your cart exactly in the middle of the beach, so you be at equal walking distance from customers on both sides of the beach. That week, you succeed at selling all the ice cream you have.
However, the next week, you go to the same beach with even more ice cream containers, only to find another man pushing an identical ice cream cart towards the same spot. You both get surprised and stop to discuss the situation. Ted seemed very understanding, and you agree to compromise so that each of you gets only 50% of the customers. You decide to divide the beach into two imaginary parts, and each sets up his cart in the middle of that part (refer to Figure A below). Again, everything runs smoothly for the week, and you start feeling lucky to have a friend for a competitor. But you go the next day only to be struck by the most appalling sight.
Ted had come earlier that day and set up his cart in your first spot, right at the middle of the beach, maximizing his customer reach and leaving you with less than 25% (as illustrated in Figure B). You feel frustrated and plan to arrive earlier than him the next day, and instead of parking your cart in the middle as he did, you decided to take his original spot at the beginning. You stand right in the middle of his half, so you now occupy more than 75% of the market, leaving him only with the few behind you (refer to Figure C). When Ted arrived, however, he does not seem very surprised. He simply does what had never crossed your mind.
He quietly sets up just in front of you (as in Figure D), jeopardizing your whole plan. By switching positions, he instead becomes who occupies about 75%. The next day, you do the same trick, and you park in front of him instead. But then he parks in front of you again, and you do the same once more (as in Figures E&F). You keep on switching places back and forth until you are both parked in the middle (Figure G). You finally stop there because if any of you proceeds further forward, it won’t be of benefit to either.
It might be confusing and perhaps seeming a bit childish, but it is very applicable in the real world. Putting it into theory, at first, when each was in the middle of their half (Figure A), it was what is called a Socially Optimal Solution (S.O.S.). It's optimal because the carts are easily accessible to all customers on the beach. However, this was only hypothetical and not practical in today’s competitive world. Both you and Ted had the chance to push your carts further towards each other and gain more of each other's customers, which you continue doing until you are both back-to-backs in the middle (Figure G). This situation is known as Nash Equilibrium. In other words, both you and Ted are currently in a position where you cannot move your carts anymore to gain any more customers, so you finally stay as you are. However, this position is not a socially optimal solution (S.O.S) anymore, as all customers must travel much more now to reach your carts. *
Think about this and try applying it everywhere you go like malls, airports, street drive-thrus...etc. You will notice the same applying to companies ranging in sizes and fields from bazaar booths and food trucks to multinational chains of fast-food restaurants, luxury clothing retailers, car showrooms, or even at the beach when you want to buy ice cream!
*Story had been retold from TED-ED’s “Why do competitors open their stores next to one another?” video. Can be retrieved from: https://www.youtube.com/watch?v=jILgxeNBK_8