Why do Amazon and Flipkart have sale(s) on the same day?
E-Commerce
You must’ve thought of this at some point - why do both e-commerce giants in India have their flagship sale(s), ‘Great Indian Festival’ v/s ‘Big Billion Day’, around the exact same days (sometime in October) each year?
Wouldn’t they be better off organising these on different days? That way customers and purchases wouldn’t have to be divided between the two parties and it would be a win-win for both of them, right? Well, not exactly.
Let us apply the same question to different scenarios:
Why is it that the exact same type of stores cluster up in a single location in a city? Why does it happen that one drives hundreds of kilometres on a highway yet does not find a single restaurant, but suddenly comes across multiple cafes and restaurants in the same spot?
Game theory
The answer to this lies in ‘Game Theory’, and more specifically in ‘Hotelling’s model of Spatial Composition’.
For this let us take you all the way to ‘India Gate’ in New Delhi. If you’ve ever had a chance to visit the monument, you cannot miss the dozens of ice-cream stalls that line up on the road in front of it.
Imagine you’re an ice-cream vendor at India Gate selling ‘Amul’ ice cream. Now, in an ideal scenario, where on the road should you put up the stall to attract maximum customers?
In the middle, right? This way you could serve customers visiting from both sides of the road, and they wouldn’t have to take a lot of steps to get your ice cream.
Socially optimal solution
It’s summer and people visiting India Gate really crave ice-creams, so you’re doing quite well. And noticing you, a friend of yours decides to set up a ‘Vadilal’ ice-cream stall at India Gate as well.
So, both of you decide to take your stalls to the opposite sides of the road. That way you could both serve 1/2 of the visiting customers and everybody would be happy. Game theorists call this a 'Socially Optimal Solution' (S.O.S).
More competition arrives
However, the next day at work, you notice that your friend has moved his stall right in the middle of the road.
You set up your stall on your corner - but now you get only 1/4 of the customers, whereas your friend gets 3/4, i.e. 1/2 of his side + 1/4 of your side.
Nash's equilibrium
So now, in order to regain 1/2 of the customers, the only place left for you is in the middle as well.
And you and your friend are now neck-to-neck in selling ice-creams in the middle of the road - none of you could move any further without losing your market share.
This is something called Nash’s equilibrium - a point where neither parties have any incentive to deviate from the current strategy.
Sure in a ‘Socially optimal scenario’ you wouldn’t encroach on each other’s territories, but that would not have reached Nash’s equilibrium, since both of you have an incentive to capture more customers.
This Game theory is the reason why the same kind of outlets - ’McDonald’s’ and ‘Burger King’ open up in the same location. Instead of both parties going to the customers, they invite the customers to come to them.
And what could be applied to ‘space’, could also be applied to ‘time’.
Imagine if Flipkart had a sale earlier than Amazon? In this case, maybe customers would want to wait for the later sale to compare prices? Or, maybe all of them would buy their required products in the earlier one?
Regardless of both scenarios, it would be an unfair advantage to either party and both would not have reached Nash's equilibrium.
This is why companies like to keep their competition as close as possible. They could then let discounts and product offerings decide who’s the winner.
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