There is an excellent YouTube video that illustrates the model here I highly encourage you to watch it before reading on! The first thing I’d like to do is introduce you to the Hotelling model, a famous bit of game theory that deals with this exact situation. Yet, all these firms with a clear profit motive often behave in a manner that contradicts seemingly intuitive logic. Why do Starbucks and Pret-A-Manger (or Coffee Bean) often have their shops next to each other? Or the same phenomenon with McDonald’s and KFC? Why do you see competing banks clustered along the same road? Surely, you think it would make more sense for two similiar and competing firms to locate themselves as far away from each other as possible. For a complete index of posts, click here.
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