Why do Restaurants Cluster?

THIS ARTICLE WAS FIRST WRITTEN BY SUDHAN AND PUBLISHED ON FINANCIALLYFREENOW

 

Singapore Restaurant Week 2012 Visual

 

When you visit an established shopping centre, have you ever wondered how the variety of restaurants survive amid all the competition? Why do such restaurants choose to be located near each other? Wouldn’t sales dwindle due to the close proximity to competitors? It sure seems ironical to be located close to a competitor.

 

Such clustering is called “agglomeration” in economics. When restaurants cluster together, there may be advantages because that cluster attracts more customers than a single restaurant alone could. Restaurants agglomerate when the benefits of agglomeration are higher than the costs involved.

 

A great example of the above would be a group of adults going for lunch. Would it make more sense to go to a venue where there are many restaurants to choose from or go to a place where there is only one standalone outlet of McDonald’s? The former makes more sense since there is a variety of restaurants and food to choose from instead of sticking to burgers.

 

Therefore, the next time you visit the restaurant cluster at Basement 1 of Jurong Point, you can appear smart by explaining to your friends why those restaurants are clustered together.

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded.The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Sudhan’s personal capacity and does not in any way represent those of his employer and other related entities. Sudhan does not own any companies mentioned above.


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