Competing for ice cream

We often wonder why restaurants and stores open next to one another. It seems to defy common sense that they do not spread themselves out, since doing so would mean less competition and easier access for consumers, who could travel less in order to arrive at the nearest restaurant. The concentration of competing firms thus appears to be an irrational phenomenon.

However, an economic theory explains all this: game theory. The concept, which many Unit 3 students have to struggle with, is complicated, and the Nash Equilibrium is particularly difficult to fully understand. This video from TED illustrates the theory in a simple and succinct way, using the example of competition between an ice cream vendor and his annoyingly business savvy cousin on a busy beach.