Johns Hopkins Magazine -- April 1997
Johns Hopkins Magazine

APRIL 1997



Charles ReVelle's Answer
Query #1

Unless the McDonald's restaurant was badly sited originally or the town has grown in a particular direction (in which case c would be best), probably the most strategic choice Burger King can make is to build its restaurant next door to the McDonald's (b). That way, Burger King provides people a choice, and the two restaurants will come close to splitting the customer base. (Of course, if the current position of the McDonald's leaves a large area of town for Burger King to capture, then the Home of the Whopper may best be placed in that unserved area.)

The origin of the insight of co-location is work done by the economist Harold Hotelling in 1929. Hotelling drew an analogy with an ice cream vendor who sets up a stand in the middle of a long strand of beach, along which customers (bathers) are uniformly distributed. A competitor arrives, hoping to capture some of the ice cream trade from the original server. The best position for the new vendor, Hotelling noted, is back-to-back with the well-positioned first vendor, allowing an even split of the market. Any other position of the new vendor would have given that new entrant a smaller market share.

You can observe Hotelling's observation in action any time you drive by a cluster of fast food outlets.

The problem becomes more complex when multiple servers, or restaurants, want to enter a market of population areas (nodes) in which a number of original servers are already operating. Say, for instance, that Burger King wants to open four new restaurants in a county in which four McDonald's restaurants are already doing well. About 10 years ago, I developed a general method to site new servers no matter what the network looks like or where the initial servers were positioned.

According to my method, new servers (circles 27 and 8) end up with healthy market shares (the nodes within the dotted lines), while original server (triangle 29) is left with almost nothing.

Sometimes a firm can even compete with itself, and it comes about this way. When a firm like Pizza Hut allows a franchise to open in a particular area, the expectation is that there is an adequate customer base. As more business people apply for franchises in the area and open their Pizza Huts, patrons tend to go to their closest restaurant when the pizza craving hits them. This causes the customer base to be divided amongst all the franchises, and profits and return on investment decline. The problem to be solved is how to allocate franchises so that the customer base never gets diluted too much between the various restaurants. That's a problem we're working on now.