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May 27th, 2019

double gas stations and Starbucks

Often we see two gas stations at one intersection, or a McDonald's and a Burger King right next to each other, or two Starbucks across from each other. We point and laugh, but why does this happen? Various possible reasons, and these may not all be the same phenomenon.

The classic economic story is Hotelling's law. Imagine two hot dog stands, identical in product and price, on a beach, competing only on location. Their competitive equilibrium is to be in the middle, splitting the population. Customers would be better off (have less total walking) if the stands were separated, but that's not stable.

Three or more stands allegedly have no stable equilibrium, short of collusion dividing up the beach.

Cute story, but most of the world isn't a finite line. Does some generalization of this explain why gas stations converge on one intersection in a grid? Maybe! But there are other explanations, including some from this thread:

* zoning means a better location isn't legally allowed

* this location is where the customers really are. (Or for gas stations, maybe you want an intersection of two busy streets for lots of easy customers, but not such a busy location that the land prices are high.)

* (relatedlY) market research directs both firms here

* Or one firm did the research and the other one is just piggybacking. (I've seen allegations that Burger King follows McDonald's around.)

But what about double Starbucks, when it's two branches of the same store?

* Directionality: one store picks up morning traffic, the other evening traffic going the other way. Works really well for drive-thrus; could also help explain competitors across from each other with a busy street (or worse, highway) in between: they're not actually the same market, despite proximity.

* And my favorite for "huh" value: growth. Say you had one Starbucks and it's doing really well, lines out the door, you need a bigger store. But can you find a bigger store? Do you want to relocate? Maybe it's simpler to just open a second one nearby and let customers divert themselves to it, especially if it's across the street so picks up a bit more traffic as well.

And if you're really optimistic about growth, you open a bigger store *and* keep the old one open.

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Damien Sullivan
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