What is Game Theory? Here's why companies open stores next to their competition

When it comes to business, there's a common belief that starting a venture in an area without any competition guarantees success. The idea behind this is that without competitors, all the demand will naturally flow to that one shop. However, this notion isn't entirely accurate, as you may have observed yourself on multiple occasions.

In cities, it's quite common to find clothing stores of various brands located side by side in markets. Similarly, you might have noticed clusters of similar restaurants or hotels in certain areas. Even when it comes to fast food chains like Subway, McDonald's, and Burger King, you'll often find them competing for customers in close proximity. This pattern extends to petrol pumps as well. At first glance, you might think this approach is self-defeating, but the reality is different. These well-known brands employ a specific business strategy, and they benefit greatly from it.

This strategy is known as game theory. Let's illustrate it with an example. Imagine there are two ice cream vendors operating on a one-kilometer-long beach. Naturally, both of them aim to expand their businesses. Initially, they set up their stalls 500 meters apart, right in the middle of the beach. In this scenario, the first vendor attracts customers on the right side, while the second vendor serves customers on the left side. The customers in the 500-meter space between them are split between the two vendors.

Now, on the following day, a vendor decides to set up a stall right in the middle of the beach in hopes of gaining more customers. As a result, they secure 62.5% of the customers, leaving the other vendor with 37.5%. In response, another vendor arrives the next day and again they evenly split the customers. This cycle continues, hindering the growth of either vendor's business. In game theory, this situation is known as a Nash equilibrium, where neither rival can expand their business further.

According to game theory, the first company will strategically open its store in an area with high business potential after conducting thorough research. The remaining rival companies can only attract customers by opening stores nearby in the same area. In this way, the other companies don't have to work as hard and can easily acquire customers.

So, contrary to the initial belief that having no competition ensures success, game theory suggests that strategic placement and proximity to competitors can actually benefit businesses by sharing customers and increasing overall footfall in the area.

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