Rao’s and Uncommon Grounds – Location Model

Rao’s and Uncommon Grounds – Location Model

By Liz, Paula, and Weiding

Oligopoly refers to market with a small number of firms. Each firms behavior is interdependent of the others meaning one firms choices affect the other firms choices. Consider Coke and Pepsi, the price Pepsi charges affects not only their sales but the sales of coke as well. Game theory analyses the strategic behavior of firms whose choices are interdependent. Each game has a player (firms), strategy (the choice the players have e.g. where I should locate the firm) and payoffs (what the player obtains as a result of playing the game). Below is an illustration of location model between Rao’s and Uncommon Grounds.

 Both Rao’s and Uncommon Grounds sell beverages, cookies and cakes .The differences between them are the quality of their products and their locations. Rao’s is located in the library while Uncommon Grounds is in Blanchard and Uncommon Grounds has higher quality of goods. Rao’s attracts students who like to study in the library and who live near the building. Those students are willing to give up the pleasure that they can get from Uncommon Grounds’ more delicious milkshakes, smoothies cupcakes for the convenience of a closer location. They choose to go to Rao’s because they value their time more than food or drink and don’t want to waste it on transportation. The same conclusion applies to Uncommon Grounds. 

            In a case where the two firms are differed only by locations, as we covered in class, the two firms will move toward the middle, as they are able to have more customers and increase their market share as well as their profits.  But in this case where two cafes are also differed by quality of foods, this model is distorted.

            Suppose Rao’s moves to a location closer to the Blanchard, let’s say, in the common room of Brigham. Then, Rao’s is supposed to attract some customers who previously went to Uncommon Grounds e.g. students who live in Brigham are more likely to go to Rao’s. However, as the locations of two cafés are much closer, people who used to consume at Rao’s may have second thoughts because Uncommon Grounds obviously has more delicious foods. Therefore, people will make their choices based on their preferences. Those who live close to Rao’s and value time more will still consume at Rao’s while those who value tasty foods more will go to Uncommon Grounds instead even though it is farther from them. Since people have different preferences, it is hard to calculate whether changing the location will attract more consumers or not. Therefore, it is not likely for Rao’s to move toward the middle.

            The same analysis can apply to the case of Uncommon Grounds’ change of location. On the contrary though, the conclusion is different. If Uncommon Grounds moves closer to the library, because it has higher quality of foods, it is able to attract customers from Rao’s. So Uncommon Grounds has the incentive to move closer to Rao’s!