E-COMMERCE

FINANCE

Why do Amazon &

Flipkart have
SALE(s) on the same
day?
NL CURIOUS

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You must’ve thought of this at some point - why do

both e-commerce giants in India have their flagship
SALE(s), ‘Great Indian Festival’ v/s ‘Big Billion Day’,
around the exact same days (some time in October)
each year?

Wouldn’t they be better off organising these on

different days? That way customers and purchases
wouldn’t have to be divided between the two parties
and it would be a win-win for both of them, right?
Well, not exactly.

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Let us apply the same question to

different scenarios -

Why is it that the exact same type of stores cluster up

in a single location in a city? Why does it happen that
one drives hundreds of kilometers on a highway yet
does not find a single restaurant, but suddenly
comes across multiple cafes & restaurants in the
same spot?

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Game Theory
The answer to this lies in ‘Game Theory’, and more
specifically in ‘Hotelling’s model of Spatial
Composition’.

For this let us take you all the way to ‘India Gate’ in
New Delhi. If you’ve ever had a chance to visit the
monument, you cannot miss the dozens of ice-cream
stalls that line up on the road in front of it.

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Imagine you’re an ice-cream vendor at India Gate

selling ‘Amul’ ice cream. Now, in an ideal scenario,
where on the road should you put up the stall to
attract maximum customers?

1/2 1/2

In the middle, right? This way you could serve

customers visiting from both sides of the road, and
they wouldn’t have to take a lot of steps to get your
ice cream.

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Socially Optimal Solution

It’s summer and people visiting India Gate really
crave ice-creams, so you’re doing quite well. And
noticing you, a friend of yours decides to set up a
‘Vadilal’ ice-cream stall at India Gate as well.

1/2 1/2

So, both of you decide to take your stalls to the

opposite sides of the road. That way you could both
serve 1/2 of the visiting customers and everybody
would be happy. Game theorists call this a 'Socially
Optimal Solution' (S.O.S).

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More competition arrives

However, the next day at work, you notice that your
friend has moved his stall right in the middle of the
road.

1/4 1/4 1/2

You set up your stall on your corner - but now you

get only 1/4 of the customers, whereas your friend
gets 3/4, i.e. 1/2 of his side + 1/4 of your side.

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Nash's Equilibrium
So now, in order to regain your 1/2 of the customers,
the only place left for you is in the middle as well.

1/2 1/2

And you and your friend are now neck-to-neck in

selling ice-creams in the middle of the road - none of
you could move any further without losing your
market share.

This is something called Nash’s equilibrium - a point

where neither parties have any incentive to
deviate from the current strategy.

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Sure in a ‘Socially Optimal Scenario’ you wouldn’t

encroach on each other’s territories, but that would
not have reached Nash’s equilibrium, since both of
you have an incentive to capture more customers.

This Game Theory is the reason why the same kind of

outlets - ’McDonald’s’ and ‘Burger King’ open up in
the same location. Instead of both parties going to
the customers, they invite the customers to come to
them.

And what could be applied to ‘space’,

could also be applied to ‘time’.

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Imagine if Flipkart had a sale earlier than Amazon? In

this case, maybe customers would want to wait for
the later sale to compare prices? Or, maybe all of
them would buy their required products in the earlier
one?

Regardless of both scenarios, it would be an unfair

advantage to either party and both would not have
reached Nash's equilibrium.

This is why companies like to keep their competition

as close as possible. They could then let discounts
and product offerings decide who’s the winner.

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