We all have been there, right? As a kid, this question bugged me a lot!
Why would a bakery be opened right next to another bakery? Or why there is a whole market of electronic goods together? This is a question that comes to everyone’s mind and we usually brush it off, right?
Well, if you have been there as well, today, we will learn about this phenomenon of competitor brands for good.
If you look around closely, you will be able to see grocery stores, restaurants, coffee shops, and even hospitals and pharmacies on the same street and located side by side.
To unlock this phenomenon, we will tell you a story about ‘Hotelling’s Model of Spatial Competition.
David is an ice cream seller at the beach. He placed his cart in the middle of the beach so that customer’s coming from all sides can go to his cart. All customers have to go there because there is no other competitor in the area. A few days later, John came up with his cart to the beach to sell ice cream.
Here comes the Socially Optimal Solution:
Now, both of them decided to split the area in the half. John will take the north half and David will take the south half of the beach. Customer does not have to go farther than even one mile and both David and John get 50% of the customer from each side of the beach.
The next day, John set up his cart in the center and David go a quarter mile farther from his location. Now, today David will be getting only 25% of the customers. However, John is getting the rest of all. The next day, David go to the beach earlier and placed his cart in the center of John’s territory assuming to make 75% of the whole beach and leaving 25% to only him – just like he did to him the other day. If you are interested in reading more about this topic you can see this website.
However, when John arrives, he sets just south of you. Now, he is getting all of the customers and you are again left with only 30% of the north. Now you again move south of John and he does the same.
This tussle was going on until both of them reaches the middle of the beach and each one of them again serves 50% of the customers arriving in the area. This is what we call ‘Nash Equilibrium. At this point, both of them are working together and sitting together making money.
Why brand use the ‘Nash Equilibrium approach and not S.O.S?
The S.O.S approach doesn’t work out in the long run due to conflicts and issues. However, when you sit side by side with your competitor, you both have reached a state where you both have made peace with each other.
Another good thing that happens here is that all the customers know the exact ice cream cart point and they all come only there to get ice cream.
Brands and small local shops still use the Nash Equilibrium approach to work with peace by sitting side by side. With this approach, all they have to do is take this competition to next level. They do branding, use tactics, give out deals, sales, and much more.
Finally,
When brands are not using the Nash approach they can be exposed to aggressive and even tougher competition without having peace of mind. Also, people like to explore different options in the same vicinity – it gives the better one more sales and the competitor to put in the extra effort! However, at the end of the day, the customer gets the most benefit out of it. And surely, the customer is the king!
