full transcript

From the Ted Talk by Jac de Haan: Why do competitors open their stores next to one another?

Unscramble the Blue Letters

Why are gas stations always built right next to other gas staintos? Why can I drive for a mile without finding a cefofe shop and then stumble across three on the same corner? Why do grercoy stores, auto repair shops and rtesnuatras always seem to exist in groups instead of being spread evenly throughout a community? While there are several factors that might go into deciding where to place your business, clusters of silamir capmeinos can be explained by a very smlipe story cealld Hotelling's Model of Spatial Competition. Imagine that you sell ice carem at the beach. Your beach is one mile long and you have no competition. Where would you place your cart in oderr to sell the most product? In the middle. The one-half-mile walk may be too far for some peolpe at each end of the beach, but your cart srvees as many people as possible. One day you show up at work just as your cousin tdedy is arriving at the beach with his own ice cream cart. In fact, he's selling exactly the same type of ice cream as you are. You argee that you will split the beach in half. In order to ensure that customers don't have to walk too far you set up your cart a quarter mile south of the bcaeh center, right in the middle of your tetirrroy. Teddy sets up a quarter mile north of the center, in the middle of Teddy territory. With this agreement, everyone south of you buys ice cream from you. Everyone north of Teddy buys from him, and the 50% of beachgoers in between walk to the closest cart. No one walks more than a quarter of a mile, and both vendors sell to half of the bearghceos. Game theorists consider this a socially optimal solution. It minimizes the maximum number of steps any visitor must take in order to reach an ice cream cart. The next day, when you arrive at work, Teddy has set up his cart in the middle of the beach. You return to your location a quarter mile south of center and get the 25% of customers to the stuoh of you. Teddy still gets all of the customers north in Teddy territory, but now you split the 25% of people in between the two carts. Day three of the ice cream wars, you get to the beach early, and set up right in the center of Teddy territory, assuming you'll serve the 75% of beachgoers to your south, leaving your cousin to sell to the 25% of customers to the north. When Teddy areivrs, he sets up just south of you stealing all of the southerly customers, and leaving you with a small group of people to the north. Not to be onutdoe, you move 10 paces south of Teddy to regain your customers. When you take a mid-day break, Teddy shuffles 10 paces south of you, and again, steals back all the customers to the far end of the beach. Throughout the course of the day, both of you continue to periodically move south towards the bulk of the ice cream buyers, until both of you eventually end up at the center of the beach, back to back, each serving 50% of the ice-cream-hungry beachgoers. At this pnoit, you and your competitive cousin have reheacd what game theorists call a Nash Equilibrium - the point where neither of you can ipvmore your position by deviating from your current strategy. Your original strategy, where you were each a quarter mile from the mlddie of the beach, didn't last, because it wasn't a Nash eriliquuibm. Either of you could move your cart towards the other to sell more ice cream. With both of you now in the center of the beach, you can't reposition your cart closer to your furthest customers without making your current customers worse off. However, you no logner have a socially omapitl soiuotln, since customers at either end of the beach have to walk further than necessary to get a seewt treat. Think about all the fast food chains, clothing boteuqius, or mobile phone kiosks at the mall. Customers may be better served by distributing services throughout a ctiommuny, but this leaves businesses vulnerable to aggressive competition. In the real world, customers come from more than one direction, and bsuneesiss are free to compete with marketing siategters, by differentiating their product line, and with price cuts, but at the haert of their strategy, companies like to keep their citpoetiomn as csole as possible.

Open Cloze

Why are gas stations always built right next to other gas ________? Why can I drive for a mile without finding a ______ shop and then stumble across three on the same corner? Why do _______ stores, auto repair shops and ___________ always seem to exist in groups instead of being spread evenly throughout a community? While there are several factors that might go into deciding where to place your business, clusters of _______ _________ can be explained by a very ______ story ______ Hotelling's Model of Spatial Competition. Imagine that you sell ice _____ at the beach. Your beach is one mile long and you have no competition. Where would you place your cart in _____ to sell the most product? In the middle. The one-half-mile walk may be too far for some ______ at each end of the beach, but your cart ______ as many people as possible. One day you show up at work just as your cousin _____ is arriving at the beach with his own ice cream cart. In fact, he's selling exactly the same type of ice cream as you are. You _____ that you will split the beach in half. In order to ensure that customers don't have to walk too far you set up your cart a quarter mile south of the _____ center, right in the middle of your _________. Teddy sets up a quarter mile north of the center, in the middle of Teddy territory. With this agreement, everyone south of you buys ice cream from you. Everyone north of Teddy buys from him, and the 50% of beachgoers in between walk to the closest cart. No one walks more than a quarter of a mile, and both vendors sell to half of the __________. Game theorists consider this a socially optimal solution. It minimizes the maximum number of steps any visitor must take in order to reach an ice cream cart. The next day, when you arrive at work, Teddy has set up his cart in the middle of the beach. You return to your location a quarter mile south of center and get the 25% of customers to the _____ of you. Teddy still gets all of the customers north in Teddy territory, but now you split the 25% of people in between the two carts. Day three of the ice cream wars, you get to the beach early, and set up right in the center of Teddy territory, assuming you'll serve the 75% of beachgoers to your south, leaving your cousin to sell to the 25% of customers to the north. When Teddy _______, he sets up just south of you stealing all of the southerly customers, and leaving you with a small group of people to the north. Not to be _______, you move 10 paces south of Teddy to regain your customers. When you take a mid-day break, Teddy shuffles 10 paces south of you, and again, steals back all the customers to the far end of the beach. Throughout the course of the day, both of you continue to periodically move south towards the bulk of the ice cream buyers, until both of you eventually end up at the center of the beach, back to back, each serving 50% of the ice-cream-hungry beachgoers. At this _____, you and your competitive cousin have _______ what game theorists call a Nash Equilibrium - the point where neither of you can _______ your position by deviating from your current strategy. Your original strategy, where you were each a quarter mile from the ______ of the beach, didn't last, because it wasn't a Nash ___________. Either of you could move your cart towards the other to sell more ice cream. With both of you now in the center of the beach, you can't reposition your cart closer to your furthest customers without making your current customers worse off. However, you no ______ have a socially _______ ________, since customers at either end of the beach have to walk further than necessary to get a _____ treat. Think about all the fast food chains, clothing _________, or mobile phone kiosks at the mall. Customers may be better served by distributing services throughout a _________, but this leaves businesses vulnerable to aggressive competition. In the real world, customers come from more than one direction, and __________ are free to compete with marketing __________, by differentiating their product line, and with price cuts, but at the _____ of their strategy, companies like to keep their ___________ as _____ as possible.

Solution

  1. order
  2. companies
  3. point
  4. agree
  5. optimal
  6. serves
  7. longer
  8. middle
  9. sweet
  10. coffee
  11. outdone
  12. beachgoers
  13. boutiques
  14. stations
  15. strategies
  16. territory
  17. reached
  18. simple
  19. solution
  20. called
  21. close
  22. businesses
  23. heart
  24. equilibrium
  25. similar
  26. people
  27. improve
  28. beach
  29. arrives
  30. grocery
  31. competition
  32. community
  33. teddy
  34. cream
  35. restaurants
  36. south

Original Text

Why are gas stations always built right next to other gas stations? Why can I drive for a mile without finding a coffee shop and then stumble across three on the same corner? Why do grocery stores, auto repair shops and restaurants always seem to exist in groups instead of being spread evenly throughout a community? While there are several factors that might go into deciding where to place your business, clusters of similar companies can be explained by a very simple story called Hotelling's Model of Spatial Competition. Imagine that you sell ice cream at the beach. Your beach is one mile long and you have no competition. Where would you place your cart in order to sell the most product? In the middle. The one-half-mile walk may be too far for some people at each end of the beach, but your cart serves as many people as possible. One day you show up at work just as your cousin Teddy is arriving at the beach with his own ice cream cart. In fact, he's selling exactly the same type of ice cream as you are. You agree that you will split the beach in half. In order to ensure that customers don't have to walk too far you set up your cart a quarter mile south of the beach center, right in the middle of your territory. Teddy sets up a quarter mile north of the center, in the middle of Teddy territory. With this agreement, everyone south of you buys ice cream from you. Everyone north of Teddy buys from him, and the 50% of beachgoers in between walk to the closest cart. No one walks more than a quarter of a mile, and both vendors sell to half of the beachgoers. Game theorists consider this a socially optimal solution. It minimizes the maximum number of steps any visitor must take in order to reach an ice cream cart. The next day, when you arrive at work, Teddy has set up his cart in the middle of the beach. You return to your location a quarter mile south of center and get the 25% of customers to the south of you. Teddy still gets all of the customers north in Teddy territory, but now you split the 25% of people in between the two carts. Day three of the ice cream wars, you get to the beach early, and set up right in the center of Teddy territory, assuming you'll serve the 75% of beachgoers to your south, leaving your cousin to sell to the 25% of customers to the north. When Teddy arrives, he sets up just south of you stealing all of the southerly customers, and leaving you with a small group of people to the north. Not to be outdone, you move 10 paces south of Teddy to regain your customers. When you take a mid-day break, Teddy shuffles 10 paces south of you, and again, steals back all the customers to the far end of the beach. Throughout the course of the day, both of you continue to periodically move south towards the bulk of the ice cream buyers, until both of you eventually end up at the center of the beach, back to back, each serving 50% of the ice-cream-hungry beachgoers. At this point, you and your competitive cousin have reached what game theorists call a Nash Equilibrium - the point where neither of you can improve your position by deviating from your current strategy. Your original strategy, where you were each a quarter mile from the middle of the beach, didn't last, because it wasn't a Nash Equilibrium. Either of you could move your cart towards the other to sell more ice cream. With both of you now in the center of the beach, you can't reposition your cart closer to your furthest customers without making your current customers worse off. However, you no longer have a socially optimal solution, since customers at either end of the beach have to walk further than necessary to get a sweet treat. Think about all the fast food chains, clothing boutiques, or mobile phone kiosks at the mall. Customers may be better served by distributing services throughout a community, but this leaves businesses vulnerable to aggressive competition. In the real world, customers come from more than one direction, and businesses are free to compete with marketing strategies, by differentiating their product line, and with price cuts, but at the heart of their strategy, companies like to keep their competition as close as possible.

Frequently Occurring Word Combinations

ngrams of length 2

collocation frequency
ice cream 8
quarter mile 4
cream cart 2
mile south 2
game theorists 2
socially optimal 2
paces south 2
nash equilibrium 2

ngrams of length 3

collocation frequency
ice cream cart 2
quarter mile south 2

Important Words

  1. aggressive
  2. agree
  3. agreement
  4. arrive
  5. arrives
  6. arriving
  7. assuming
  8. auto
  9. beach
  10. beachgoers
  11. boutiques
  12. break
  13. built
  14. bulk
  15. business
  16. businesses
  17. buyers
  18. buys
  19. call
  20. called
  21. cart
  22. carts
  23. center
  24. chains
  25. close
  26. closer
  27. closest
  28. clothing
  29. clusters
  30. coffee
  31. community
  32. companies
  33. compete
  34. competition
  35. competitive
  36. continue
  37. corner
  38. cousin
  39. cream
  40. current
  41. customers
  42. cuts
  43. day
  44. deciding
  45. deviating
  46. differentiating
  47. direction
  48. distributing
  49. drive
  50. early
  51. ensure
  52. equilibrium
  53. evenly
  54. eventually
  55. exist
  56. explained
  57. fact
  58. factors
  59. fast
  60. finding
  61. food
  62. free
  63. furthest
  64. game
  65. gas
  66. grocery
  67. group
  68. groups
  69. heart
  70. ice
  71. imagine
  72. improve
  73. kiosks
  74. leaves
  75. leaving
  76. line
  77. location
  78. long
  79. longer
  80. making
  81. mall
  82. marketing
  83. maximum
  84. middle
  85. mile
  86. minimizes
  87. mobile
  88. model
  89. move
  90. nash
  91. north
  92. number
  93. optimal
  94. order
  95. original
  96. outdone
  97. paces
  98. people
  99. periodically
  100. phone
  101. place
  102. point
  103. position
  104. price
  105. product
  106. quarter
  107. reach
  108. reached
  109. real
  110. regain
  111. repair
  112. reposition
  113. restaurants
  114. return
  115. sell
  116. selling
  117. serve
  118. served
  119. serves
  120. services
  121. serving
  122. set
  123. sets
  124. shop
  125. shops
  126. show
  127. shuffles
  128. similar
  129. simple
  130. small
  131. socially
  132. solution
  133. south
  134. southerly
  135. spatial
  136. split
  137. spread
  138. stations
  139. stealing
  140. steals
  141. steps
  142. stores
  143. story
  144. strategies
  145. strategy
  146. stumble
  147. sweet
  148. teddy
  149. territory
  150. theorists
  151. treat
  152. type
  153. vendors
  154. visitor
  155. vulnerable
  156. walk
  157. walks
  158. wars
  159. work
  160. world
  161. worse