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Game theory and fast food restaurants

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Fast food restaurants tend to cluster together. That is, on one corner, there may be four similar fast-food restaurants.
a) How game theory explain this behavior?
b) If you were the manager of one of this fast food restaurants, what could you do to maximize profits?

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Game theory

According to Investopedia, game theory is "a model of optimality taking into consideration not only benefits less costs, but also the interaction between participants." In your example, this interaction relates to the interaction between the four restaurants on the same street corner who face each other on a daily basis and have to compete, and each restaurant hopes to be preferred over the other restaurants. Basically, this means it needs to offer an optimal amount of food at an optimal price.

Let's us look at a simplified example of two competing restaurants on that same street corner. Imagine that Restaurant 1 and Restaurant 2 are both diners ...

Solution Summary

The following posting discusses how game theory can explain how fast food restaurants tend to cluster together.

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