Nash Equilibrium and why competitors are close to each other?

When you go on long drives and you are running out of fuel gradually, you start looking for petrol bunks/gas stations. Miles pass without the stations and suddenly you find two – each positioned just opposite to each other. Does Nash Equilibrium have a role to play here? Let’s check another example.

You will find a lot of restaurants that are next to each other in the same location rather than being spread out along your way. When you think of it deeply, it does not make sense at all to have your competition in the vicinity. Why give options to your customers when you can be the only one raking in the profits?

There is a research backed reason why the businesses of the same kind stay right close to each other and it is based on Nash Equilibrium formulated by John Nash.

In game theory, the Nash equilibrium is a solution concept of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his own strategy ( Source : Wikipedia )

As a business, when you make a move to get more customers, your competitor who is closeby will make his move to nullify your move. This goes on and on until you reach a point where both your business and your competitor’s has nothing to gain from changing the current setup. This stage is the ” Nash Equilibrium ”

As the popular saying goes ” Keep your friends close but your enemies closer “. Following the Nash equilibrium has a lot of strategic advantages for the brands.

Advantages of keeping your competitors closer

1. The Choice factor : 

Customers love to see a lot of choices before they zero down on a purchase. We have got accustomed to malls and we know we might get better deals as we scan the next store in line. They do not mind spending time to get the same product / service at a better price. Closer you are to the competition, more are your chances.

2. More footfalls :

In the malls, the eateries are all grouped in a separate space and it’s called the food court. This means a family of 4 can buy food from four different outlets or more depending on their preferences and dine together. Any person who crosses the food court and all the varied inviting outlets will be forced to make a decision of eating or buying something. Sometimes when there are more choices, you will have a new thought to deal with which was not in the plans.

When you are driving on the highway, you will find two to three food joints or fast food eateries together on the side with a lot of cars parked. You will decide to take a break to eat because subconsciously you feel you might not get to see eating options anywhere close in the next hour.

Psychology kicks in and human mind decides to follow what others are doing. This explains why McDonald’s, Burger King and Subway are found right next to each other in the place below.

The collective pull of a group of food joints are definitely greater than a single inviting brand.

3. Advertising Advantages : 

You can stand to gain from your competitor’s advertising spends. The more footfalls they generate to the vicinity is good for you as you are closer too and some smart campaigns can make you look cool and garner the attention. Getting a share of the pie from your competitor’s advertising spends is a good deal.

Nash Equilibrium

But if you want to go heads on in terms of advertising spends, you are free to do that too and both parties might be able to gain more or less equal returns on the investments.

4. Competitor Analysis is a breeze : 

When your competitor is right across the door, it is hard to miss their marketing hacks, promotional content, flyers and more. You can even hire someone to be a mystery shopper who can visit your competitor’s store and give you inside information of the deals, your target segment is going bananas about.

If you are interested in knowing more about the sales hacks used by your neighborhood supermarkets, you can read here.

———

To understand this concept of Nash Equilibrium better, this TED – Ed video will be super helpful.

I hope you have a fair understanding of Nash Equilibrium now and how brands benefit more by being next to each other instead of being far away from each other.

If you have any interesting thoughts or examples to share about the applications of Nash Equilibrium, feel free to share in the comments.

06 comments on “Nash Equilibrium and why competitors are close to each other?

Leave a comment

Your email address will not be published. Required fields are marked *