Why do similar businesses operate close to each other?

Oftentimes we see similar businesses that provide identical services under different monikers operating side-by-side, eating away at their own customer base. In the context of Kathmandu, it is evidently seen in almost every street, Putalisadak is known as the consultancy hub, Kamalpokhari road sells all bakes and bread, and the lassi shops in ‘Indrachowk’ are clustered right next to one another. Why? Isn’t that unhealthy competition? Won’t distancing the business be more profitable than clustering them?

Businesses survive, improve and sustain themselves with the competition. This makes them innovative and creative. This benefits the customers too as we have more options. Businesses want to locate themselves near the center of their potential customer population to attract the greatest amount of customers. Businesses can observe each other’s strategies and mend or improve themselves too. This keeps the business flowing.

The theory known as ‘the socially optimal solution’ clarifies best why businesses open together. In a space divided in half, the best and most profitable position is both businesses besides one another in the center, doing this helps each business serve a fair proportion of customers.

Even if a new business opens away from clustering, this will lead to two chances, if they profit, they will eventually invite tough competitors near them and if they don’t, they fail.

In most situations we see businesses thrive in clusters. They create a hub that already has fame and a fixed pool of customers. All businesses mutually benefit and have their fair share of profits. The business that works harder profits more, but this creates competition and new trends and products.

However, clustering businesses can be a harsh game when the competition is unhealthy. The Lassi shops at Indra Chowk can serve as an example. Makhan Sweet Lassi, a shop that has separated itself from the hub, has shown its contempt for the unhealthy lassi competition. “We opened our shop near Kathmandu Durbar Square because we were fed up with the toxicity of competition at Indrachowk. We used to work in the original and famous lassi shop and were offered a good sum of salary to work there, but less is still better if your mind is at peace. Forcing the public customers to choose which shop to pick ruined our public image.”

The original and first Lassi shop which has been running for the last 17 years, Indra Chowk Lassi Pasal says, “We understand that competitors want to open next to us, which is acceptable, but stealing and forcing customers from us is unacceptable. We should all stay calm and accept the customers' preferences. It is tiring to shout at the top of our lungs all the time. We want to mutually grow.”

A customer is free to choose, and business clustering helps them do that. Businesses should be creative and carry fair competition. Ultimately, business clustering could be a win-win game.