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WHY DO COMPETITORS OPEN THEIR STORES NEXT TO ONE ANOTHER?

Ever wondered why competing businesses open next to each other? Dive into the intriguing world of Game Theory and explore this strategic phenomenon.

Thursday July 13, 2023,

Have you ever wondered why two cafes or petrol stations are often right next to each other, but then there's none for miles? At first, this might seem odd. Wouldn't a shop get more customers if it's far from its competitor? The answer to this puzzle can be found in something called Game Theory, particularly a concept known as the Nash Equilibrium.

To explain this idea, let's imagine a situation. There are two ice cream sellers, Seller A and Seller B, on a one-kilometer long beach. They both want to sell as much ice cream as possible. On day one, they set up their stalls halfway down the beach, with Seller A on one side and Seller B on the other. This way, each of them gets about half the beach-goers. It's a fair split.

However, Seller B wants more. So, on the second day, he moves his stall to the middle of the beach. Now, he gets more customers - about 62.5%, leaving Seller A with only 37.5%.

Seeing this, Seller A also moves to the middle of the beach on the third day. Now, they're both back to splitting the customers 50/50. Neither can move without losing customers to the other. This situation is called a Nash Equilibrium in Game Theory, named after the mathematician John Nash.

In simple terms, a Nash Equilibrium is a situation where no one can benefit by changing only their own strategy; if any changes are to be made, they have to be done by all the players. In our beach example, both ice cream sellers are now stuck in the middle, because moving away would mean fewer customers.

This theory isn't just about ice cream sellers, though. It's the reason why real shops, restaurants, and petrol stations often set up next to their competitors. Being near competitors means more potential customers are around, and moving away could mean missing out on these customers.

So, it may seem strange, but setting up a shop right next to a competitor can be a smart move. The next time you see two competing shops side by side, remember it's not just a coincidence. They're following a principle from Game Theory - the Nash Equilibrium. It's all part of the game of business, where sometimes, the best move is to stick close to your competition.