Watch: Game theory explains why stores that sell the same products bunch together

Business Insider SA
  • Game theory can explain how hundreds of similar shops selling similar products can exist side-by-side in Istanbul's Grand Bazaar.
  • Businesses cluster next to each other because everyone wants a central location to be close to a lot of customers.
  • The guild system that underpinned the creation of the bazaar is long gone, but the incentive to sell there remains.

The Grand Bazar in Istanbul is one of the oldest covered markets in the world. It's home to over 3,000 shops, with visitors from all over the world — haggling with shopkeepers to get the biggest bang for their buck.

People shop in Istanbul's famous Grand Bazaar in Istanbul, Turkey (Photo by Chris McGrath/Getty Images)

When you look around though you may see some familiar stores selling the same products all bunched together. Jewellery, fabrics furniture, carpets, leather goods and clothes.

Now, how do they make all make money? Don't they steal each other's business?

Well, not really.

Using game theory, the explanation of the Grand Bazaar puzzle goes  something like this:

Two ice cream carts compete on a beach.

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We can think of the beach as a straight line that goes from one end to the other.

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If the two ice creams carts are spread out evenly across the beach, the one on the left will get all the customers on the left side and the one on the right will get all the customers on the right side.

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So each ice cream seller wants to be closer to more customers. And the way to achieve that is moving closer to the middle. When the cart on the right moves closer to the middle it steals the other ice cream seller's customers.

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Now it has more than half of the sales. The cart owner on the left considers this situation and moves to the right regaining some of its customers. Ultimately, they both end up at the centre of the beach which makes them equally close to the customers on the beach.

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Neither of them will want to move away from the centre.

This is the reason why businesses cluster next to each other: everyone wants a central location to be close to as many customers as possible.

That explains how the Grand Bazaar retains it shops, but is not how it started.

Until the mid-19th century guilds protected consumers by setting price limits and imposing quality standards as it distributed raw materials to its members. So, the merchants back in the day did not have the incentive to get as many customers as possible unlike the ice cream sellers on the beach.

The location for each type of merchandise was established in the early days of the Grand Bazaar. Through a gradual process, shops of travelling merchants evolved into permanent locations.

As the number of shops increased, a cluster formed. When the guild system disintegrated after 1865 shopkeepers in the Grand Bazaar gained more autonomy over what they could sell and where – but clustering still made sense, because the Grand Bazaar attracted potential customers.