<p>Often that is the best response to what other firms are doing. In a simple Hotelling game with homogenous goods and perfect information, assuming two competitors trying to locate themselves on a line segment (e.g. some street), where both companies compete for customers that will always choose the closest business, it is Nash equilibrium for both companies to locate themselves next to each other in the middle of the line segment.</p>
<p>This is because if a one company occupies the center of the line segment the other company will always get less customers if it also does not position itself exactly in the center. So best response of both firms to what the other firm is doing is to both locate in the center to maximize sales.</p>
<p>Whether this occurs depends on whole host of factors. For example, when the consumer transportation costs are very high firms will have more incentive to locate further apart to 'soften' the price competition between them. Next, differentiation plays role. Generally, the more the product is differentiated the less incentive there is to locate exactly next to the competitor. Geometry of the space makes difference (e.g. line, circle, grid). Some geometries make encourage firms to locate next to each other why others might not.</p>
<p>These are just examples, because of multiple possible geometries of space and ways firms can compete there are numerous variants of Hotelling game. In different versions of the game different factors may play significant role in what the equilibrium(ia) is(are). You can have look at Tadelis Game Theory: An Introduction or Fudenberg and Tirole Game Theory, for some examples of various Hotelling games and see when they produce equilibria where players locate next to each other and when not.</p>

CC BY-SA 4.0
2022-09-21T05:39:14.830Z
I love the Hotelling model, reviewed papers on the topic. I even wrote a research mimeo about spatial competition over a graph topology, which represents streets much better. I am also quite convinced that the model has very little to do with the placement of retail shops; visibility and the amount of traffic just passing by play a much larger role.
Giskard
CC BY-SA 4.0
2022-09-21T05:39:58.493Z
Also, even on the line segment the equilibrium of the central position is not robust, it depends on the cost function, see D'Aspremont et al. (1979).
Giskard
CC BY-SA 4.0
2022-09-21T10:29:20.623Z
I find it amazing how this answer makes me feel like this thing is something really deep and the other one makes me feel like it's some simple to solve issue
Brian
CC BY-SA 4.0
2022-09-21T13:14:02.513Z
@Giskard you are right the equilibrium is not robust that’s why I also mentioned that it depends on host of another factors
1muflon1
CC BY-SA 4.0
2022-09-21T13:15:10.673Z
@TrystwithFreedom there are multiple effects at play. The effects mentioned by giskard are also valid but the strategic interaction plays role as well, I chose to emphasize the strategic interaction part. IRL it’s empirical question which factors dominate in particular case.
1muflon1
CC BY-SA 4.0
2022-09-21T13:27:16.573Z
@1muflon1 I will argue further against the validity of the strategic models (: These models all treat the consumer as existing in a certain point, rather than having a daily routine which takes them along a certain route. They also do not consider group action, e.g.: meeting up in a restaurant will force us to consider the location relative to several people. The Hotelling model is a nice idea with interesting incentives/dynamics, but the basic assumptions are unrealistic, and in multidimensional spaces even the theoretical models yield wild results.
Giskard
CC BY-SA 4.0
2022-09-20T23:10:58.200Z
2022-09-20T23:10:58.200Z
1muflon1
<p>A possible explanation is that you know of the &quot;Book street&quot; and the &quot;Restaurant quarter&quot;. Thus a lot of people looking for these specific services will come to these locations. You could open your shop somewhere else; of the people passing by some may be looking for just such a shop, and they will probably become your customers. By doing this however you are losing out on the large amount of people specifically looking for the service you offer, because most of these people will go to _____ street.</p>
<p>Some remarks:</p>
<ol>
<li><p>_____ street will essentially function like a platform, hosting several shops of the same variety.</p>
</li>
<li><p>Economies of scope may also play a role, as similar shops may rely on similar suppliers. By delivering to several shops in the same street, the supplier can cut down on costs and some of the savings may be passed on to their customers, the shops.</p>
</li>
</ol>

CC BY-SA 4.0
2022-09-21T05:50:07.583Z
2022-09-21T10:36:53.240Z
2022-09-21T10:36:53.240Z
Giskard
<p>I have noticed that in some areas I go to is filled with shops of the same type. For example , Restaurants which more or less have the same menu. Sometimes, people give such places names as  &quot;Book street&quot; , &quot;Electronic street&quot; etc.</p>
<p>It seems so this only happens in some special areas of a place. What are the conditions required for such a situation to happen?</p>

<microeconomics>
Why in some area businesses with similar premise place near each other?
Brian
# Why in some area businesses with similar premise place near each other?

(Asked by: username_0 on 2022-09-20)

I have noticed that in some areas I go to is filled with shops of the same type. For example , Restaurants which more or less have the same menu. Sometimes, people give such places names as "Book street" , "Electronic street" etc.

It seems so this only happens in some special areas of a place. What are the conditions required for such a situation to happen?

**Tags:** microeconomics

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## 2 answers

### Answer by username_1 on 2022-09-20. Score: 1

Often that is the best response to what other firms are doing. In a simple Hotelling game with homogenous goods and perfect information, assuming two competitors trying to locate themselves on a line segment (e.g. some street), where both companies compete for customers that will always choose the closest business, it is Nash equilibrium for both companies to locate themselves next to each other in the middle of the line segment.

This is because if a one company occupies the center of the line segment the other company will always get less customers if it also does not position itself exactly in the center. So best response of both firms to what the other firm is doing is to both locate in the center to maximize sales.

Whether this occurs depends on whole host of factors. For example, when the consumer transportation costs are very high firms will have more incentive to locate further apart to 'soften' the price competition between them. Next, differentiation plays role. Generally, the more the product is differentiated the less incentive there is to locate exactly next to the competitor. Geometry of the space makes difference (e.g. line, circle, grid). Some geometries make encourage firms to locate next to each other why others might not.

These are just examples, because of multiple possible geometries of space and ways firms can compete there are numerous variants of Hotelling game. In different versions of the game different factors may play significant role in what the equilibrium(ia) is(are). You can have look at Tadelis Game Theory: An Introduction or Fudenberg and Tirole Game Theory, for some examples of various Hotelling games and see when they produce equilibria where players locate next to each other and when not.

> **Comments:**
> **username_2**: I love the Hotelling model, reviewed papers on the topic. I even wrote a research mimeo about spatial competition over a graph topology, which represents streets much better. I am also quite convinced that the model has very little to do with the placement of retail shops; visibility and the amount of traffic just passing by play a much larger role.  
> **username_2**: Also, even on the line segment the equilibrium of the central position is not robust, it depends on the cost function, see D'Aspremont et al. (1979).  
> **username_0**: I find it amazing how this answer makes me feel like this thing is something really deep and the other one makes me feel like it's some simple to solve issue  
> **username_1**: @Giskard you are right the equilibrium is not robust that’s why I also mentioned that it depends on host of another factors  
> **username_1**: @TrystwithFreedom there are multiple effects at play. The effects mentioned by giskard are also valid but the strategic interaction plays role as well, I chose to emphasize the strategic interaction part. IRL it’s empirical question which factors dominate in particular case.  
> **username_2**: @1muflon1 I will argue further against the validity of the strategic models (: These models all treat the consumer as existing in a certain point, rather than having a daily routine which takes them along a certain route. They also do not consider group action, e.g.: meeting up in a restaurant will force us to consider the location relative to several people. The Hotelling model is a nice idea with interesting incentives/dynamics, but the basic assumptions are unrealistic, and in multidimensional spaces even the theoretical models yield wild results.  

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### Answer by username_2 on 2022-09-21. Score: 1

A possible explanation is that you know of the "Book street" and the "Restaurant quarter". Thus a lot of people looking for these specific services will come to these locations. You could open your shop somewhere else; of the people passing by some may be looking for just such a shop, and they will probably become your customers. By doing this however you are losing out on the large amount of people specifically looking for the service you offer, because most of these people will go to \_\_\_\_\_ street.

Some remarks:

1. \_\_\_\_\_ street will essentially function like a platform, hosting several shops of the same variety.
2. Economies of scope may also play a role, as similar shops may rely on similar suppliers. By delivering to several shops in the same street, the supplier can cut down on costs and some of the savings may be passed on to their customers, the shops.


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