The Hotelling model of spatial competition

Have you ever noticed that restaurants located near eachother? Same with coffee shops, supermarkets, furniture shops, car showrooms, clothing stores… Take a look around and you will notice that competitors deliberately choose to locate near eachother. Here’s why.

When in particular location more than one similar business unit available it will attract more customers. For example cluster of a few restaurants will attract more customers than same number of restaurants located one kilometer away. Customers love variety and convenience.

Businesses choose the best location. Same competitors do. In result similar or identical businesses located near by. If it’s duopoly that market will be split 50/50. But idea half an half split rarely possible in real life.

According to the game theory, the Nash equilibrium for non-cooperative business strategies, two or more business owners has nothing to gain by changing own strategy. So, businesses selected the best possible strategy and no farther improvement could be achieved. That’s why across the globe you will see cluster of similar businesses located near each other.

A few examples of cluster location from:

Zaveri Gold market in South Mumbai.

Mumbai Diamond Bourse.

Mangaldas fabric market

Chikki market Lonavala

Examples of cluster location everywhere.

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