Presh Talwalkar noticed this phenomenon and used game theory to explain why it’s a rational decision for the gas stations, even if it’s not the optimal choice for consumers. It’s worth reading his entire post to understand the nuances of the shortcomings of the explanation, the theory of location competition, and where to place a hot dog stand on the beach. However, for those short on time, here’s my simplified explanation:
If a gas station (or any retailer) was a monopoly, they could locate wherever they wanted and force consumers to come to them. However, the threat of competition forces stores to try to determine a location that captures maximum market share. In other words, they want to be in central location for their target audience, minimizing the distance consumers have to travel. Of course, all competing retailers are simultaneously making the same decision which means the resulting stores end up clustered together.
Read full blog post here.