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I have noticed that in some areas I go to is filled with shops of the same type. For example , Restaurants which more or less have the same menu. Sometimes, people give such places names as "Book street" , "Electronic street" etc.
It seems so this only happens in some special areas of a place. What are the conditions required for such a situation to happen?
Often that is the best response to what other firms are doing. In a simple Hotelling game with homogenous goods and perfect information, assuming two competitors trying to locate themselves on a line segment (e.g. some street), where both companies compete for customers that will always choose the closest business, it is Nash equilibrium for both companies to locate themselves next to each other in the middle of the line segment.
This is because if a one company occupies the center of the line segment the other company will always get less customers if it also does not position itself exactly in the center. So best response of both firms to what the other firm is doing is to both locate in the center to maximize sales.
Whether this occurs depends on whole host of factors. For example, when the consumer transportation costs are very high firms will have more incentive to locate further apart to 'soften' the price competition between them. Next, differentiation plays role. Generally, the more the product is differentiated the less incentive there is to locate exactly next to the competitor. Geometry of the space makes difference (e.g. line, circle, grid). Some geometries make encourage firms to locate next to each other why others might not.
These are just examples, because of multiple possible geometries of space and ways firms can compete there are numerous variants of Hotelling game. In different versions of the game different factors may play significant role in what the equilibrium(ia) is(are). You can have look at Tadelis Game Theory: An Introduction or Fudenberg and Tirole Game Theory, for some examples of various Hotelling games and see when they produce equilibria where players locate next to each other and when not.
A possible explanation is that you know of the "Book street" and the "Restaurant quarter". Thus a lot of people looking for these specific services will come to these locations. You could open your shop somewhere else; of the people passing by some may be looking for just such a shop, and they will probably become your customers. By doing this however you are losing out on the large amount of people specifically looking for the service you offer, because most of these people will go to _____ street.
Some remarks:
_____ street will essentially function like a platform, hosting several shops of the same variety.
Economies of scope may also play a role, as similar shops may rely on similar suppliers. By delivering to several shops in the same street, the supplier can cut down on costs and some of the savings may be passed on to their customers, the shops.
