0:00:15.108,0:00:19.085 Why are gas stations always built[br]right next to other gas stations? 0:00:19.109,0:00:21.815 Why can I drive for a mile[br]without finding a coffee shop 0:00:21.839,0:00:24.143 and then stumble[br]across three on the same corner? 0:00:24.167,0:00:27.051 Why do grocery stores,[br]auto repair shops and restaurants 0:00:27.075,0:00:28.718 always seem to exist in groups 0:00:28.742,0:00:31.901 instead of being spread evenly[br]throughout a community? 0:00:31.925,0:00:33.456 While there are several factors 0:00:33.480,0:00:36.164 that might go into deciding[br]where to place your business, 0:00:36.188,0:00:39.796 clusters of similar companies can[br]be explained by a very simple story 0:00:39.820,0:00:42.292 called Hotelling's Model[br]of Spatial Competition. 0:00:43.121,0:00:45.217 Imagine that you sell[br]ice cream at the beach. 0:00:45.241,0:00:48.051 Your beach is one mile long[br]and you have no competition. 0:00:48.075,0:00:51.269 Where would you place your cart[br]in order to sell the most product? 0:00:51.293,0:00:52.368 In the middle. 0:00:52.392,0:00:55.418 The one-half-mile walk may[br]be too far for some people 0:00:55.442,0:00:56.741 at each end of the beach, 0:00:56.765,0:00:59.770 but your cart serves[br]as many people as possible. 0:00:59.794,0:01:01.118 One day you show up at work 0:01:01.142,0:01:03.522 just as your cousin Teddy[br]is arriving at the beach 0:01:03.546,0:01:04.900 with his own ice cream cart. 0:01:04.925,0:01:06.317 In fact, he's selling 0:01:06.341,0:01:08.516 exactly the same type[br]of ice cream as you are. 0:01:08.540,0:01:10.793 You agree that you will split[br]the beach in half. 0:01:10.817,0:01:13.634 In order to ensure that customers[br]don't have to walk too far 0:01:13.658,0:01:16.572 you set up your cart a quarter mile[br]south of the beach center, 0:01:16.596,0:01:18.412 right in the middle of your territory. 0:01:18.436,0:01:20.751 Teddy sets up a quarter mile[br]north of the center, 0:01:20.775,0:01:22.768 in the middle of Teddy territory. 0:01:22.792,0:01:25.935 With this agreement, everyone south[br]of you buys ice cream from you. 0:01:25.959,0:01:29.489 Everyone north of Teddy buys from him,[br]and the 50% of beachgoers in between 0:01:29.513,0:01:31.172 walk to the closest cart. 0:01:31.196,0:01:33.751 No one walks[br]more than a quarter of a mile, 0:01:33.775,0:01:36.653 and both vendors sell[br]to half of the beachgoers. 0:01:36.677,0:01:40.836 Game theorists consider[br]this a socially optimal solution. 0:01:40.860,0:01:44.352 It minimizes the maximum number[br]of steps any visitor must take 0:01:44.376,0:01:46.352 in order to reach an ice cream cart. 0:01:46.376,0:01:48.235 The next day, when you arrive at work, 0:01:48.259,0:01:51.034 Teddy has set up his cart[br]in the middle of the beach. 0:01:51.058,0:01:54.301 You return to your location[br]a quarter mile south of center 0:01:54.325,0:01:57.069 and get the 25% of customers[br]to the south of you. 0:01:57.093,0:02:00.635 Teddy still gets all of the customers[br]north in Teddy territory, 0:02:00.659,0:02:04.702 but now you split the 25% of people[br]in between the two carts. 0:02:04.726,0:02:07.584 Day three of the ice cream wars,[br]you get to the beach early, 0:02:07.608,0:02:10.167 and set up right in the center[br]of Teddy territory, 0:02:10.191,0:02:13.632 assuming you'll serve[br]the 75% of beachgoers to your south, 0:02:13.656,0:02:17.026 leaving your cousin to sell[br]to the 25% of customers to the north. 0:02:17.050,0:02:20.520 When Teddy arrives,[br]he sets up just south of you 0:02:20.544,0:02:22.451 stealing all of the southerly customers, 0:02:22.475,0:02:25.259 and leaving you with a small group[br]of people to the north. 0:02:25.283,0:02:29.336 Not to be outdone, you move 10 paces[br]south of Teddy to regain your customers. 0:02:29.360,0:02:32.836 When you take a mid-day break,[br]Teddy shuffles 10 paces south of you, 0:02:32.860,0:02:36.535 and again, steals back all the customers[br]to the far end of the beach. 0:02:36.559,0:02:38.134 Throughout the course of the day, 0:02:38.158,0:02:40.417 both of you continue[br]to periodically move south 0:02:40.441,0:02:42.836 towards the bulk of the ice cream buyers, 0:02:42.860,0:02:45.860 until both of you eventually end up[br]at the center of the beach, 0:02:45.884,0:02:49.719 back to back, each serving 50%[br]of the ice-cream-hungry beachgoers. 0:02:49.743,0:02:51.935 At this point, you[br]and your competitive cousin 0:02:51.959,0:02:54.951 have reached what game theorists[br]call a Nash Equilibrium - 0:02:54.975,0:02:57.774 the point where neither of you[br]can improve your position 0:02:57.798,0:02:59.937 by deviating from your current strategy. 0:02:59.961,0:03:01.398 Your original strategy, 0:03:01.422,0:03:04.446 where you were each a quarter mile[br]from the middle of the beach, 0:03:04.470,0:03:07.086 didn't last, because it wasn't[br]a Nash Equilibrium. 0:03:07.110,0:03:10.936 Either of you could move your cart[br]towards the other to sell more ice cream. 0:03:10.960,0:03:13.246 With both of you now[br]in the center of the beach, 0:03:13.270,0:03:16.902 you can't reposition your cart[br]closer to your furthest customers 0:03:16.926,0:03:19.212 without making your current[br]customers worse off. 0:03:19.236,0:03:22.568 However, you no longer have[br]a socially optimal solution, 0:03:22.592,0:03:24.592 since customers at either end of the beach 0:03:24.616,0:03:27.602 have to walk further than necessary[br]to get a sweet treat. 0:03:27.626,0:03:29.570 Think about all the fast food chains, 0:03:29.594,0:03:32.271 clothing boutiques,[br]or mobile phone kiosks at the mall. 0:03:32.295,0:03:33.879 Customers may be better served 0:03:33.903,0:03:36.164 by distributing services[br]throughout a community, 0:03:36.188,0:03:39.520 but this leaves businesses vulnerable[br]to aggressive competition. 0:03:39.544,0:03:42.786 In the real world, customers come[br]from more than one direction, 0:03:42.810,0:03:45.715 and businesses are free to compete[br]with marketing strategies, 0:03:45.739,0:03:48.501 by differentiating their product line,[br]and with price cuts, 0:03:48.525,0:03:50.252 but at the heart of their strategy, 0:03:50.276,0:03:53.621 companies like to keep their competition[br]as close as possible.