How Game Theory Explains Why Fast Food Restaurants are Always So Close to Each Other
Source: https://mindyourdecisions.com/blog/2012/10/23/why-are-mcdonalds-and-burger-king-usually-located-near-each-other-fast-food-location-game-theory/
The article, “Why are McDonald’s and Burger King usually located near each other? Fast food location game theory” by Presh Talalkar discusses why fast food restaurants compete next to each other so often. Talalkar sets up a game using hypothetical values and rewards to show that sharing profits with nearby restaurants is more effective than taking most of the profits of a low populated area. The game ends up being relatively simple. The stores only have two options, compete with another restaurant at a highly populated location and split profits, or go to lowly populated areas and enjoy all the profits for themselves. This game is very similar to the games we set up in class. This is because the game consists of two strategies, and according to Talalkar one of the strategies is dominant.
To set up the game, Talalkar assumes that if two restaurants compete directly next to each other, they will evenly split the profits. Next, Talalkar creates ten arbitrary locations ranked one through ten with ten being the most profitable. Each of the two stores then choose five locations. McDonald’s chooses six, seven, eight, nine, and ten while Burger King chooses five, six, seven, eight and nine. With this setup, McDonalds’s profit points (the sum of the profitable locations with the shared locations counting for half) was twenty-five and Burger King’s was twenty. Because of this, McDonald’s had 56% of the market share compared to Burger King’s 44%. To fix this, Burger King would move a position from the area rated five, to the area rated ten to compete with McDonald’s. Since the profits are now split between McDonald’s and Burger King, Burger King’s profit points don’t change, but McDonald’s loses five points. However, Burger King’s market share now increases to 50%, which is the reason it’s the dominant strategy. To conclude, fast food restaurants often compete directly next to each other because it is the dominant strategy when considering profits and market share.