You might have wondered why so often you’ll see clusters of the same types of businesses grouped together. Like a few coffee shops, or restaurants, or gas stations. Would it not be better for them to be more spread out? A short video on TED-Ed explains why that is the case, but it just doesn’t happen.
The video has an example of an ice cream seller on a beach. On the first day, he’s the only one there so he places himself in the middle and sells his ice creams. On the second day, there’s another ice cream seller shifting the same product, and they divide the beach between themselves, each moving their cart one-quarter of the way from the middle.
This is the spread-out scenario that would guarantee that customers everywhere on the beach would have to travel no more than one-quarter of the size of the beach to reach an ice cream vendor. But this scenario is not stable because either of them could decide to move slightly closer to the middle, taking away some of the customers from the other one.
So for the businesses, the best scenario – known in game theory as Nash Equilibrium – is for both ice cream vendors to be back-to-back in the middle of the beach. That’s because one can’t increase their payoff by changing strategy if the other players keep the same strategy. So, if you wonder why businesses cluster instead of spreading out and giving a better service to customers, now you have an explanation.