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Applying Game Theory to Gas Station Clusters

In his article, “Why Gas Stations Are So Close To Each Other”, Jonathan Becher talks about the phenomena of gas stations all being located in the same general area. He also references a post by Presh Talwalkar, who explains exactly how game theory works in terms of how these stores tend to locate themselves. Talwalkar explains that gas stations will tend to cluster wherever the demand for gas is highest (for example, by the entrance to a freeway or in a city). If there is only one gas station, then it is easy for them to choose a location because the customers will come to them. However, if there is another gas station and only a single stretch of land where there is more demand for gas, then this situation gets a little more complicated.

Becher explains that clustering will always become the norm eventually. For example, there are two things that a gas station can choose to do: either relocate to a location farther away from other gas stations, or find a prime location where there are other gas stations. If it settles in the prime location, then it joins the cluster. However, if it goes to a farther location, it will either become successful (and thus cause other gas stations to come cluster around it), or fail at getting customers and thus return to a more prime location. No matter what decision the gas station makes, it will end up in a cluster. As a result, we can see how game theory applies, as gas stations have choices in terms of where to open but end up with the best payoff if they stay in a cluster. This is where Nash Equilibrium applies, because the gas stations end up having no incentive to move outside of their cluster, because they will either fail or end up with a cluster forming around them.

So even though it would intuitively make more sense (in the mind of customers) for gas stations to be spread apart, we can see that due to game theory, gas stations tend to end up in the same place so that more customers get attracted to the same area and will perhaps choose their station out of the cluster.

Sources:

https://www.forbes.com/sites/sap/2012/05/21/why-gas-stations-are-so-close-to-each-other/#7fe99adc5827

Hotelling’s Game, or Why Gas Stations Have Competitors Nearby

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