Have you ever noticed that you rarely see a gas station by itself? Instead multiple gas stations seem to be clustered close to each other. Wouldn’t it be better if they were more spread out?
Presh Talwalkar noticed this phenomenon and used game theory to explain why it’s a rational decision for the gas stations, even if it’s not the optimal choice for consumers. It’s worth reading his entire post to understand the nuances of the shortcomings of the explanation, the theory of location competition, and where to place a hot dog stand on the beach. However, for those short on time, here’s my simplified explanation:
If a gas station (or any retailer) was a monopoly, they could locate wherever they wanted and force consumers to come to them. However, the threat of competition forces stores to try to determine a location that captures maximum market share. In other words, they want to be in central location for their target audience, minimizing the distance consumers have to travel. Of course, all competing retailers are simultaneously making the same decision which means the resulting stores end up clustered together.
If a retailer opens a new location away from the current clustering, there are two potential results:
- It will fail to capture enough consumers and eventually close.
- It will become successful causing competitive stores to locate nearby.
Either way, clustering remains the norm.
Of course, my marketing bent requires me to point out that this theory assumes brand doesn’t matter when, in fact, we know that consumers have strong brand preference for many products, including gasoline. It also assumes that competitors have nearly identical offerings. Unfortunately, this is often the case.
Presh points out one other example of this clustering effect: politicians.
If voters pick the candidate closer to their views, and voters are spread out across the spectrum, then both candidates would converge to the middle. It’s no surprise that politicians seek the “average vote.”
Since the product offering is often indistinguishable between the politicians, voters typically rely on the brand preference to decide. That is, the don’t decide based on the person but rather they choose a political party.
Thanks for the post!
You make a great point about competitiveness: An outlier will only be an outlier until they either succeed or fail. And if they succeed, others will follow.
Michael Porter (of Harvard’s Institute for Strategy and Competitiveness) studied this kind of clustering on a larger scale — i.e. watchmakers in Switzerland and microchips in Costa Rica. I imagine some of the same considerations that exist at that larger (national) level also exist on a smaller scale, too.
Gas stations will locate together to be competitive, as you said, but they are guided by some specific parameters: Demand from customers, affordability of vendor delivery, and access to workforce are three factors that come to mind.
Growing up I always laughed at this concept with gas stations and the same with fast food restaurants. It made no sense! But it was one of the first lessons I learned in business (and then it all made sense.) Good job on the post, you explained it nicely.
Reblogged this on Daily Shenanigans.