By: Barry Cobb
No matter which direction your commute takes you in Springfield, there are strategically placed wayfinding signs that publicize three areas — downtown, Battlefield retail and Bass Pro Shops.
As my family settled into the southwest part of town two years ago, we often made the trek down James River Freeway toward the Battlefield retail district. If we needed an item for home improvement, there were essentially two choices — Home Depot and Lowe’s — located within blocks of each other. For casual dining, we ventured to Red Robin or Outback Steakhouse, all the time lamenting the lack of restaurant options closer to our neighborhood. When the wait at one restaurant was too long, we walked across the street to the other. Eventually, we noticed some other local options in the same vicinity. The wayfinding signs were a visual reminder that brought to mind a couple of questions. Why do some businesses cluster together? What does this mean for someone who wants to open his/her own business?
A classic location model from economics can be illustrated by the case of two ice cream vendors selling similar products on a beach. This basic idea was first described by Harold Hotelling in a 1929 paper titled “Stability in Competition.” Suppose people on the beach are more or less evenly spread out. The location choices of the vendors might proceed as follows:
- The first vendor puts down stakes in the middle of the beach.
- The second vendor doesn’t like the idea of being right next to a competitor, so she locates nearer to one end of the beach.
- This second vendor captures the market at that end, but likely loses almost all potential sales from anyone ready for a treat on the opposite side of the competitor in the middle.
- The eventual solution: the ice cream vendors locate right next to each other in the middle of the beach, with each capturing about half the market.
Ken Stief determined that three pairs of retailers — Target and Walmart, Starbucks and Dunkin’ Donuts, McDonalds and Burger King — exhibited a particularly strong tendency to co-locate — the “hotelling” effect. More complicated is the case of a new business, opening in Springfield, that needs to determine where it should locate. But the example illustrates some potential advantages of being near competitors (and some of the reasons we find existing businesses in certain locations).
Locating your business next to your competition might seem counterintuitive, but consider the possible benefits:
- Competitors may already be located in a certain area due to positive demographics and traffic patterns.
- Established competitors may have already committed significant effort and advertising expenditures to drive customers to that specific location.
- The location of potential competitors in a geographic area may indicate the existence of a convenient labor pool.
Rayanna Anderson, director of Missouri State University’s Small Business & Technology Development Center, notes two important reasons competitors are often found near each other. “You may locate near a competitor if you can bring in a complementary business or because that is where customers reside,” she said.
If you’re interested in starting a business that depends on foot traffic to generate customers, there is a chance that your competition may point you to a good location.
References:
Hotelling, Harold (1929), “Stability in competition,” Economic Journal 39 (153): 41–57.
Spaeder, Karen E. (2005), “How to find the best location,” Entrepreneur, July 2005. http://www.entrepreneur.com/article/73784 (accessed March 21, 2016).
Stief, Ken (2013), “Why do certain retail stores cluster together?” Planetizen. October 2013. http://www.planetizen.com/node/65765 (accessed March 21, 2016).
Barry Cobb is interim department head in the Department of Management at Missouri State University. He holds a Ph.D. from the University of Kansas and conducts research and consulting in the areas of operations and supply chain management.
This article appeared in the April 2nd, 2016 edition of the Springfield News-Leader and can be accessed online here.