Auto malls and equilibrium

A lot of car buying in California takes place in “auto malls.” These are clusters of car dealers who all set up shop right next to each other. There are two kinds of clusters – the standard cluster (Honda, Toyota, Volkswagen, etc.) and the luxury cluster (Porsche, BMW, etc.).

So, why do they all cluster together instead of setting up shop away from their competitors? For the same reasons competing brands set up shop at a mall, it turns out that clustering together increase the chances of making a sale for everyone.

It also turns out that it is the optimal solution as it satisfies the Nash equilibrium. Here’s a great 4 minute video that explains this.