Why Do Competitors Set Up Shop Near Each Other?

I am a big fan of the Planet Money series on NPR. Any student struggling with the economic aspects of business associations can use Planet Money and NPR’s other financial series, Marketplace, to get grasp of what is going on. Marketplace tends to focus on the day’s events. PM takes a little time and explores topics. One that I just listened to was called Your Friend or Foe? As the show puts it “Planet Money examines an age-old but confusing question: why do businesses selling the same thing crowd around each other rather than stake out a bit of space on their own?” The piece reminds me of some of Frischmann and Lemley’s Spillover’s article, although I am not sure the idea of competing right next to each other maps to the article’s main ideas about innovation. Instead the story may fit better with ideas about healthy marketplaces and competition. Some of the arguments for setting up shop near competitors smack of free-riding. Yet, listen to the show. The shopkeepers are all engaged in the behavior, know it, and use it to their mutual advantage while still driving prices down. Some the reasons for these decisions may have more to do with search costs. Other issues seem to show that pure internalization of externalities is not always the choice. I’m not sure that this situation is a commons approach as Frischmann, Madison, and Strandburg describe it, but it seems to run parallel to the way I think the Netflix Prize operated (a mix of private incentives and common benefits interacting so that otherwise hard to explain behavior makes sense). In short, I found the podcast thought provoking and worth the listen.

You can listen to the podcast here.

As a side note, I have no idea why NPR does not allow an embedded stream feature a la YouTube or Imeem. If there is a way to do that, can someone please let me know? There are a few more podcasts I plan on highlighting, and I’d like to make it as easy as possible for folks to obtain the content.