Why do competitors open their stores next to one another? And other related musings.

I stumbled across this great animated video detailing why competitors open their stores next to one another. The TED video got my attention by asking a simple question: "Ever wondered why similar stores are found near each other? Why restaurants are often found in clusters?" 

I hadn't thought about this before, and in my experience - restaurants are clustered together. Is this to make it more convenient for customers? To prey off of a competitors existing customer base by giving those customers an easy alternative option? I know, for example, that when Vida e Cafe embarked on an aggressive growth strategy, they opened their cafes right next to all the established Seattle Coffee houses and other competing coffee shops. They did this to hijack their competitors' customers by offering  a superior product (including the overall customer experience) in close proximity to these competitors.

Or is there some other business dynamic at play here that encourages similar businesses to group together in close proximity?

The TED ED video below describes this phenomenon with reference to two principles of Game Theory.

Socially Optimal Solutions: this is what would happen if businesses cooperated to offer the best solution for society at large. In practice, this doesn't happen.

The Nash Equilibrium: businesses will iteratively position themselves until their is no further utility to be gained from further positioning moves. In practice, this is at the heart of competition.

And once Nash Equilibrium has been established, businesses use other tools, such as marketing and advertising, to compete further.

For purely online businesses, where physical space is a non issue, I wonder if the Nash Equilibrium translates to other competitive behaviour. My only experience of this is when online companies compete via online marketing channels and outbid one another for advertising space. And so one of the ways to compete with an incumbent is to match their marketing spend and/or execute more effective marketing campaigns and thereby exceed their marketing ROI.

Whatever the drivers, I think this adds a new meaning to the saying "Keep your friends close, and your enemies closer".

Here's the TED ED video I mentioned above. It's a great example of a short narrated video, with engaging visuals to confirm the teacher's lessons. I'd argue this format of video is representative of one of the most effective teaching tools available to us today: