Have you ever noticed how gas stations, coffee shops, and restaurants often seem to be clustered together in one area? You might wonder why businesses don’t spread out more evenly across a community. The answer lies in a concept called Hotelling’s Model of Spatial Competition.
Imagine you’re selling ice cream on a one-mile-long beach. If you’re the only vendor, you’d place your cart right in the middle to serve the most people. This way, no one has to walk more than half a mile to get a treat.
Now, let’s say your cousin shows up with another ice cream cart. To make it fair, you both agree to split the beach in half. You set up a quarter mile south of the center, and your cousin sets up a quarter mile north. This way, everyone on the beach has to walk no more than a quarter mile to get ice cream, and you both serve half of the beachgoers.
Game theorists call this arrangement a “socially optimal solution” because it minimizes the distance anyone has to walk. However, the next day, your cousin moves his cart to the center of the beach. You return to your original spot, but now you both split the customers in the middle.
On the third day, you try to outsmart your cousin by setting up in the center of his territory. He responds by moving just south of you, taking all the southern customers. You then move 10 paces south to regain your customers, and the cycle continues.
Eventually, you both end up back-to-back in the center of the beach, each serving 50% of the customers. This is known as a Nash Equilibrium, where neither of you can improve your position by changing your strategy.
While this strategy works for you and your cousin, it’s not the best for customers at the far ends of the beach, who now have to walk further. This scenario is similar to what happens with fast food chains, clothing stores, and phone kiosks in malls. Businesses cluster together to avoid losing customers to competitors, even if it means customers have to travel further.
In reality, businesses also compete through marketing, unique products, and pricing strategies. But at the core, many prefer to keep their competition close to maintain a competitive edge.
Understanding why businesses cluster together can give you insights into market strategies and consumer behavior. While it may not always be the most convenient for customers, it often makes sense for businesses trying to maximize their reach and minimize competition.
Recreate the beach scenario with your classmates. Use a large open space and mark out a “beach” area. Each of you will play the role of an ice cream vendor. Try to find the best position for your cart to maximize your customer base. Discuss how your decisions change when more vendors join the beach.
Take a walk around your local community or use online maps to identify clusters of similar businesses. Create a map highlighting these clusters and analyze why these businesses might have chosen to locate near each other. Present your findings to the class.
Engage in a role-play activity where you and a partner simulate the decision-making process of competing businesses. Use a simple game theory model to decide on your strategies and see if you can reach a Nash Equilibrium. Reflect on how these strategies apply to real-world business scenarios.
Research a real-world example of a business cluster, such as Silicon Valley for tech companies or a local shopping mall. Analyze the benefits and drawbacks for both businesses and consumers in these clusters. Share your analysis with the class through a presentation or report.
Participate in a class debate on the pros and cons of business clustering. Divide into two groups, one supporting clustering and the other opposing it. Use evidence from the article and additional research to support your arguments. Conclude with a discussion on how clustering affects consumer choices and business strategies.
**Sanitized Transcript:**
Translator: Tom Carter
Reviewer: Bedirhan Cinar
Why are gas stations often located next to each other? Why can I drive for a mile without finding a coffee shop, only to find three on the same corner? Why do grocery stores, auto repair shops, and restaurants tend to cluster together instead of being evenly distributed throughout a community?
While there are several factors that influence business location decisions, clusters of similar companies can be explained by a concept known as Hotelling’s Model of Spatial Competition.
Imagine you sell ice cream at the beach. Your beach is one mile long, and you have no competition. Where would you place your cart to sell the most product? In the middle. The 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, your cousin arrives at the beach with his own ice cream cart, selling the same type of ice cream. You agree to split the beach in half. To ensure customers don’t have to walk too far, you set up your cart a quarter mile south of the center, while your cousin sets up a quarter mile north of the center. With this arrangement, everyone south of you buys ice cream from you, and everyone north of your cousin buys from him. The 50% of beachgoers in between walk to the closest cart, ensuring no one walks more than a quarter of a mile, and both vendors serve half of the beachgoers.
Game theorists consider this a socially optimal solution, as it minimizes the maximum distance any visitor must walk to reach an ice cream cart.
The next day, when you arrive at work, your cousin has moved his cart to the middle of the beach. You return to your original location a quarter mile south of the center and serve 25% of customers to the south. Your cousin still serves all the customers north of him, but now you split the 25% of people in between.
On day three of the ice cream competition, you arrive early and set up in the center of your cousin’s territory, hoping to serve the 75% of beachgoers to your south. When your cousin arrives, he sets up just south of you, taking all the southern customers and leaving you with a small group to the north. Not to be outdone, you move 10 paces south of your cousin to regain your customers. During your break, your cousin shifts 10 paces south of you, reclaiming all the customers at the far end of the beach.
Throughout the day, both of you continue to move south towards the bulk of the ice cream buyers until you both 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 cousin have reached what game theorists call a Nash Equilibrium—the point where neither of you can improve your position by changing your current strategy.
Your original strategy, where you were each a quarter mile from the center, didn’t last because it wasn’t a Nash Equilibrium. Either of you could move your cart closer to the other to sell more ice cream. Now that both of you are 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, as customers at either end of the beach have to walk further than necessary to get a treat. Consider 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 multiple directions, and businesses can compete through marketing strategies, product differentiation, and price cuts. At the core of their strategy, companies often prefer to keep their competition close.
Competition – The rivalry among sellers trying to achieve goals such as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. – In a free market economy, competition among businesses leads to better products and services for consumers.
Strategy – A plan of action designed to achieve a long-term or overall aim, particularly in business or economics. – The company’s strategy to lower prices helped it gain a larger share of the market.
Market – A place or system in which commercial dealings are conducted, or the demand for a particular product or service. – The smartphone market has become increasingly competitive with new models being released every year.
Customers – Individuals or businesses that purchase goods or services from a company. – Understanding the needs of customers is crucial for businesses to succeed in a competitive market.
Theory – A supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained. – The theory of supply and demand is fundamental to understanding how prices are determined in a market economy.
Behavior – The actions or reactions of individuals or groups in response to external or internal stimuli, often analyzed in economics to predict market trends. – Consumer behavior can significantly influence the success of a new product launch.
Equilibrium – A state in which economic forces such as supply and demand are balanced, resulting in stable prices. – Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers.
Clustering – The phenomenon where firms from the same industry gather together in close proximity, often to benefit from shared resources and knowledge. – The clustering of tech companies in Silicon Valley has led to rapid innovation and growth in the industry.
Vendors – Individuals or companies that sell goods or services, often in a market or business context. – Vendors at the trade show showcased the latest advancements in renewable energy technology.
Implications – The possible effects or consequences of an action or decision, especially in a business or economic context. – The implications of the new trade policy could lead to increased costs for imported goods.
