Why do competitors open their stores next to one another? - Jac de Haan
TED-Ed・4 minutes read
Hotelling's Model of Spatial Competition illustrates that similar businesses cluster to optimize customer access, as demonstrated by two ice cream vendors adjusting their locations on a beach to maximize sales while reaching a Nash Equilibrium. This strategy can lead to inefficiencies for some customers, particularly those at the ends of the beach who now face longer distances to access services.
Insights
- Hotelling's Model of Spatial Competition illustrates how businesses, like ice cream vendors on a beach, strategically position themselves to maximize customer reach, leading to a scenario where they initially spread out but ultimately cluster in the center, creating a Nash Equilibrium that benefits them but can disadvantage customers at the edges who must walk farther for their desired products.
- This model highlights a broader trend in business strategy where companies intentionally locate near their competitors, such as fast food chains or retail stores, to draw in more customers, demonstrating that while clustering can enhance access for many, it can also result in inefficiencies and longer travel times for some consumers.
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Recent questions
What is spatial competition in business?
Spatial competition refers to the strategic positioning of businesses in relation to one another to maximize customer access and minimize competition. This concept is illustrated by the clustering of similar businesses, such as ice cream vendors on a beach, where they adjust their locations to capture the largest share of customers. As competitors enter the market, they often position themselves in a way that divides the customer base, leading to a balance where neither can improve their sales by changing their location. However, this can result in inefficiencies for customers located at the edges, who may have to travel further to access services. Ultimately, spatial competition highlights the trade-off between business strategy and customer convenience.
How do businesses choose their locations?
Businesses choose their locations based on a variety of factors, primarily aimed at maximizing customer access while minimizing competition. The strategic placement often involves clustering with similar businesses, as this can attract more customers who prefer to have multiple options in one area. For instance, fast food chains often locate near one another to benefit from the increased foot traffic generated by their proximity. However, this clustering can lead to a situation where customers at the periphery face longer travel distances, illustrating the balance businesses must strike between competitive advantage and customer convenience. Ultimately, location decisions are influenced by market dynamics, customer behavior, and the competitive landscape.
What is a Nash Equilibrium in business?
A Nash Equilibrium in business refers to a situation where competing firms reach a state of balance in their strategies, such that no firm can benefit by unilaterally changing its position. In the context of spatial competition, this occurs when businesses adjust their locations to maximize customer reach, ultimately settling in positions where any change would not lead to increased sales. For example, in the case of ice cream vendors on a beach, once they both move to the center, they create a scenario where neither can improve their sales by relocating. This equilibrium, while stable for the businesses, may not be optimal for customers, particularly those located at the ends of the market, who may have to walk further for access.
Why do businesses cluster together?
Businesses cluster together primarily to enhance customer access and increase their market share. This strategic choice allows them to benefit from the foot traffic generated by the presence of competitors, as customers often prefer to have multiple options in close proximity. For example, retail stores and fast food chains frequently establish themselves near one another to attract a larger customer base. However, this clustering can lead to inefficiencies, as customers at the edges of the cluster may have to travel further to reach their desired service. Despite this potential drawback for consumers, businesses find that being near competitors can ultimately lead to greater overall sales and customer engagement.
What are the effects of competition on customer access?
The effects of competition on customer access can be both positive and negative. On one hand, competition encourages businesses to position themselves strategically to attract customers, often leading to clustering in popular areas. This can enhance customer access as consumers have multiple options available in a single location. However, as businesses adjust their locations to optimize their reach, it can create situations where customers at the periphery face longer distances to access services. For instance, in the case of ice cream vendors, while those in the center benefit from easy access, customers at the ends may have to walk significantly further. Thus, while competition can drive business efficiency and customer choice, it can also lead to accessibility challenges for some consumers.
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Summary
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Clustering Strategy in Spatial Competition Explained
- Hotelling's Model of Spatial Competition explains why similar businesses cluster together, using the example of two ice cream vendors on a one-mile beach. Initially, one vendor places their cart in the middle to maximize customer reach, but when a competitor arrives, they split the beach into territories, each setting up a quarter mile from the center to serve their respective customers without anyone walking more than a quarter mile.
- As competition intensifies, both vendors continuously adjust their positions to capture more customers, ultimately moving to the center of the beach. This results in a Nash Equilibrium, where neither vendor can improve their sales by changing their location, but it also creates a less optimal situation for customers at the ends of the beach, who now have to walk further for ice cream.
- The clustering of businesses, such as fast food chains or retail stores, is a strategic choice to minimize competition and maximize customer access, despite potentially leading to less efficient service for consumers. Businesses often prefer to be near competitors to attract more customers, even if it means some customers have to travel further.
