Three theories prove why competitors open stores next to each other

Why competitors are often neighbors

Why is it that businesses often cluster together? Doesn’t it seem logical that if you wanted to open a store, you would move far away from your competitor to serve those that are further away? While the logic makes sense at first glance, three business theories show why it isn’t actually optimal for competitors to be extremely far away from each other, and why they act like magnets:

Hotelling’s Model of Spatial Competition

Simply put, this is the principle explaining why businesses cluster in groups instead of spreading evenly throughout a community.

To dig deeper and learn more:

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1. “The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition”
2. “Equilibrium in Hotelling’s Model of Spatial Competition”
3. “Spatial Modes of Party Competition”

Socially Optimal Solution (S.O.S.)

S.O.S. is when most customers have to travel a minimal amount of distance to purchase a product.

To dig deeper and learn more:

1. “Modern Industrial Organization” Chapter 3
2. “Markets with Differentiated Products. Oligopoly: Horizontal Product Differentiation.”

The Nash Equilibrium

This is the point where no retail location can improve its position by deviating from its current strategy.

To dig deeper and learn more:

1. “Rationality, Computability, and Nash Equilibrium”
2. “Nash Equilibrium without Mutual Knowledge of Rationality”
3. International Encyclopedia of the Social Sciences, “Nash Equilibrium” defined