Wednesday, December 16, 2009

Why is there always a Burger King next to a McDonald's?

So the good people who brought you those two "This American Life" pod casts about the economy recently had a show that reminded me of on of my favorite ideas in economics. All of you are just looking at the blog to get information for the final but reading this blog post is a great way to procrastinate.

The show is from the podcast Planet Money: Episode 128, "Friend of Foe". It's easily found on ITunes.

Okay, so, we start out on a beach with two hot dog venders. They can be hot dog venders, gold merchants or Indian food restaurants. Basically the assumption here is perfect competition. That is, these hot dog venders sell the same product for the same price. That means that consumers (beach goers) are indifferent between buying goods from both hot dog venders. The reason they sell hot dogs on the beach is because the idea is easier to illustrate in two dimensions.
Now originally the two hot dog venders decide to divide up the beach equally. Assume that I have basic graphic design skills and that the blue and the red squares are the same size. By the way, those dots are the hot dog venders.

After standing on the beach for 8 hours a day 7 days a week Vender A realizes something:

If Vender A stands just to the left of Vender B a lot more customers—who only really care about how far they have to walk to get a hot dog—are closer to him than they are to Vender B.

Naturally Vender B catches on pretty quickly

Now Vender B has the bigger market share.

To save myself more embarrassing illustrations I’m going to just say that it should be clear that there is only one place on the beach where the two hot dog venders finally stop pushing their carts all over the beach:

Here they are both right next to each other. There is no reason for either vender to move further left or right since that means they will lose market share to the other vender. Basically they have the same market share they would have had if they had just agreed on the intuitively equal division of the beach and they would have saved themselves a lot of pushing their carts around.

And so you have it, it is economically rational for the always to be a Burger King next to a McDonald's.

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