Why competing stores always seem to occur next to each other … or why not


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A recent (seemingly unsuccessful) stint hunting for non-academic articles on spatial aggregation of stores produced curious results. Naturally, many people observe at some point that a.) supposed fierce competitors like Exxon/Mobile and Shell or CVS and Walgreen’s surprisingly frequently appear in tandem, that is to say right next to each other and b.) often even bigger groups of competing stores like car dealerships seem to cluster in certain areas.

Eager for knowledge as human beings (ideally) are, the internet provides massive evidence for users on the quest for the roots of the above described phenomena. Now, the curious part are the answers floating around on the world wide web. Surprisingly, there seems to be no popular trusted media outlet which answers the question (I am thankful if proved wrong and pointed towards the desired direction). Among the attempts showing the most hits is a short SAP article published via Forbes’ BrandVoice feature which can be found here. A few seconds suffice to realize that this article is merely an executive summary of a blog post of author Presh Talwalkar which itself can be found here. These two  pieces are (near) perfect representatives of the majority of (non-academic) justifications of the two above scenarios on the internet.

They, correctly, link scenario a.) above to the basic Hotelling model. Hotelling explains in a simple model why strategic reasoning leads two competing stores to choose an identical location in a local duopoly. In order to stress the old example once more, consider a (linear) beach served by two ice cream stands. Assume the beach to be busy, such that potential customers are distributed uniformly over its entire length. Further assume, for simplicity, that the stands offer the same flavors and quality of ice cream at identical prices and competition is purely executed via location. Since walking over hot sand is uncomfortable, every customer opts to buy ice cream as close as possible to her towel spot. Game theory predicts that both ice cream vendors end up in the middle back to back. Why is that? Suppose one of the vendors to position his stand anywhere north (south) of the middle. Its competitor could swiftly just move an inch south (north) of it to ensure himself more than half of the customers. As a consequence, both stands right next to each other in the middle constitutes the unique Nash equilibrium of the outlined game since in any other scenario at least one of the vendors can make himself better off by unilaterally moving his stand. This is a “strict” Nash equilibrium in the sense that every unilateral deviation causes a vendor to be worse off.

While this simplistic model does not capture the entirety of location choice in duopolies in reality, it is a perfectly reasonable approach to explain why CVS and Walgreen’s can be frequently found across the street of each other, or, as in this special case in Edina, Minnesota, in such close proximity to each other that drive through clerks can wave to each other. In fact, numerous academic articles have claimed that the simple Hotelling approach is a powerful predicition tool in local duopolies. It is, however, crucial to understand that this behavior is nothing specific to representatives of national or global chains as some articles on the internet want us to believe. The simple Hotelling duopoly model applies to strategic competition of national giants CVS and Walgreens in downtown Chicago or San Francisco as much as it does to family operated pharmacies in a rural village in Maine (as long as the village is sufficiently populous to have two pharmacies operate profitably).

The more striking claim to be found in the above referenced articles and the set of pieces they represent is, however, that this logic generalizes to clusters of competing stores like car dealerships. It is straightforward to falsify this claim. Reconsider the above discussed ice cream vendors and bring a third one into play. If this entrant positions himself right in the middle of the beach next to the two incumbents he can expect to serve approximately a third of the beach population drooling over ice cream. Moving slightly north or south of the middle, however, ensures him nearly half the customers. As a result, the basic Hotelling model does not explain why you typically drive by car dealerships for minutes once you passed the first. The logic of the Hotelling model does simply not extend to a scenario featuring a number of competitors in excess of two. Analogously, the same reasoning explains why in a two party system winning the median voter is key, whereas in a multi party system we witness parties positioning significantly to the left or right of each other.

Clustering of car dealerships, furniture stores, etc. is much more likely to be caused by a common effort to reduce customers’ search costs combined with zoning restrictions set by municipalities. Simplified, as car dealerships (to stick to one story) are typically located on the outer fringes of urban areas, it would be mighty costly for a potential customer to drive all over town to compare and test drive vehicles of multiple brands. Thus, she is likely to pre-select a smaller number of manufacturers to visit in the first place. This, in turn, would result in a lower average number of potential customers to enter a car dealership every given day. This reasoning is also consistent with the fact that it has been observed that brands which are closer substitutes to each other are more likely to be found in clusters. Chicago’s northern suburbians for instance may find Subaru, Volkswagen, Mazda, Nissan and Fiat in the Evanston/Skokie area whereas Mercedes, BMW, Infiniti, Volvo and Land Rover are located on the same road in Glencoe.

In the case of dealerships selling bulky and expensive items which require huge parking lots, loading and storing capacity or direct access to roads in the case of cars, regulations passed and incentives provided by local governments seem to further foster clusters. In order to raise their attractiveness to potential customers and residents alike, municipalities might restrict potential storefront locations via zoning or grant tax reliefs to induce the birth of shopping parks. While such factors might also come into play regarding clustering of pharmacies or gas stations, they seem to be less likely the driving forces behind the location coupling of competitors. On the other hand, central strategic positioning predicted in the Hotelling duopoly does not account for suburban clusters of car dealerships as exemplified with three ice cream vendors above.


Brexit and why it is worse than you might think



It seems quite certain to this hour that the people of the United Kingdom opted to leave the European Union. While the pound has started plummeting and experts have been quite robustly forecasting a drop in GDP exceeding one percent, the common Britain will most likely not face any severe personal consequences from those developments. Most likely, he is even more than willing to trade these minor caveats against some (fictitious) increase in sovereignty, the convenience of continued debate about professional athletes’ weight in stones and the triumph of the pint over half a liter of ale.

The immediate consequences of “Brexit” to the UK economy, no matter how often eloquently repeated by experts and self-proclaimed ones, represent, however, a rather minor part of the big picture. The influx of refugees from the middle East, the resurgence of terrorism in Europe and financial turmoil combine to a prolific breeding ground for nationalism and myopia.

A continent (to a large extent) disproportionately spoiled by peace and prosperity struggles to come to terms with modern reality. Uncertainty and fear augment the words of Gerd Wilders, Heinz-Christian Strache, Viktor Orban, the Le Pen clan and their equals.

Brexit might instill the belief in their minds that their long term goals of sovereignty and social austerity have never been as realizable as in this moment. While the phalanx of conservatives and social democrats in the leading economies of Europe appear to be too powerful (yet), this is far from fact for many smaller European countries and, sadly, historical evidence does not draw a too rosy picture of “a Europe” in lack of cohesion and solidarity.

Birth rates in Amazonia



To my students:

Consider the following scenario:

In the country of Amazonia boys are valued but girls are worshipped. No mother, however, wants to give birth to multiple girls in order to avoid succession struggles related to the leadership of the family. Thus, every mother gives birth to children precisely until a daughter is born to her.

a) If the probability of giving birth to a son is .5, what ratio of newborns in Amazonia are girls?

b) If the probability of giving birth to a son is 0<s<1, what ratio of newborns in Amazonia are girls?

Why luck matters more than you might think


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My (in the not so far) future colleague Robert H. Frank, Professor of Economics at the Samuel P. Curtis Johnson Graduate School of Management at Cornell University, has recently published his new book “Success and Luck“.

While not denouncing the views of those who attribute unexpected turns of their lives and ventures to divine intervention or plain fate, he shares his beliefs about the ubiquity of chance as a determinant of success in both our private and business lives and indicates why many among us simply underestimate, or, alternatively put stronger, under appreciate the consequences of mere random processes. Bob convincingly argues, however, that chance does not only influence our well-being in a consequential manner but deeply affects many of our actively taken decisions.

Due to the fact that chance features prominently as a determinant of entrepreneurial success in my current work on team building, acquisition of inputs and entrepreneurship, I have admit to be naturally biased towards his chain of argumentation.

Nevertheless, I highly recommend every (in fact also non-) academic and student to read his book as it stresses a perspective of our ventures typically under represented in our ex ante analyses and ex post evaluations of actions. While featuring interesting and partially provocative content, it presents itself also easy too read due to him being a very accomplished writer (Bob Frank was a NY Times columnist for more than a decade). A synopsis of his work can be found in this recent piece of the Atlantic. A taste of the book itself is provided by Princeton University Press.


Goodbye Keith Murnighan

Keith Murninghan, professor at the department of Organization & Behavior at the Kellogg School of Management, Northwestern University lost his fight against cancer last Friday. While increasing vertical specialization of PhD programs leads us typically not to know most professors of other departments (while physically close there are academically enormous distances), I was lucky enough to meet Keith several times during my executive MBA teaching stints at the Evanston and Miami campuses of Kellogg. Certainly not being an expert in his research field, I am, however, aware that Keith has been a major contributor to the literature of conflict resolution, in particular opposing group and individual behavior.

More importantly though, from my subjective perspective, he was a special person treating every MBA and PhD student with the utmost respect, always showing genuine interest in one’s work. I had the opportunity to get to know him a little during social events at executive MBA teaching weekends. Not only did he possess an extraordinary interdisciplinary interested mind, but he was also one of the kindest persons I have met during my time at Kellogg. Thus it did not come as a surprise to me that I met him at multiple private graduation events of Kellogg students.


Here you can find the official Kellogg notification.

The prisoner’s dilemma in the republican primaries


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Kevin Quealy (@KevinQ) wrote a nice piece in last week’s NY Times analyzing the race for the Republican nomination from a game theory perspective. While I was slightly irritated by Rubio’s classification as a mainstream candidate, it’s an interesting application of basic game theory principles worth reading.

UBER rents during the Paris strike


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Public transport servants as well as cab drivers of Paris decided to strike today. Amongst other resasons, they protest against the access of amateur drivers like UBER to the personal transportation market, which in so many European countries typically requires licensing. The bulk of UBER drivers go along with the strike in order not to stir up emotions even further.

While this is true for the majority of drivers, some appear to defect, most likely due to a lack of information and more importantly to realize potentially huge gains from offering a scarce good. UBER prices are determined by an algorithm depending on supply and demand for rides within a given period in a specific area. Prices this morning were already 8.3 times higher than the base fare. In addition, some foreign cab drivers, in particular Belgian residents, are expected to take on this unique arbitrage opportunity.

I am not aware of the specifics of French competition laws but it seems highly likely that this behavior, while rational, must violate racketeering guidelines. Due to the immense cost of identification, prosecution seems unlikely though. Thus, it remains only to hope for a more subtle resolution than last time this conflict erupted. If not, the French government might have a decent case to blame UBER executives for not disabling their algorithm during the strike. Since this seems to be in the interest of strike participants-and potential rioters-in the first place, an undesirable scenario seems possible.

Stiglitz on “The Great Divide”


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On Sunday, November 30, Joseph Stiglitz advertised his new book “The Great Divide” at the Vienna University of Economics and Business Administration (WU). Neither did I attend the lecture nor do I have access to any recording. My only record of his words is a German article in the Austrian daily newspaper “Der Standard” (which can be accessed here). That means, Stiglitz has been first translated into German and in what follows I re-translate into English. Given this sounds like an instance of the children’s game telephone, there might well be content lost in translation.

Nevertheless, I was quite surprised by what I read. According to the article (as objectively translated as I could) Stiglitz said:

“Demanding solidarity is not easy in good times. It becomes, however, politically dangerous if poverty and unemployment are on the rise since [in this case] it generates breeding grounds for right wing extremist parties. This also holds true for countries like Germany and Austria. Society should not only solidarize with refugees but also with low-income (and low-skill) workers. Those should be increasingly supported by the wealthy elites in these countries by re-distributional policies to avoid social tensions. Necessary funds could be generated by “wealth taxes” [private capital or equity taxes].”

There certainly is a deeper truth to this statement anywhere in the world. Also, it hardly comes as a surprise. However, I was somewhat startled to see it applied to Germany and Austria, admittedly the two countries with the biggest refugee influx per capita recently, but also two countries among the world-leading in equality and the extent of tax funded social services.