Game Theory in Outlets—How Should Stores Maximise Profit?

The concept of the outlet store was firstly developed by Anderson-Little in 1936. Through the prolonged history of this special model of discount business, it has been proven to bring various positive effects to most shops. I will give a brief introduction to this business model, explaining the function of the outlet’s store to their mother company. This paper will put the main focus on implementing game theory, the Hotelling model, to give a new approach to potentially analyse and explain the mechanism behind the competition between outlets and the normal store. In this paper, I have found the equilibrium and more importantly, how the travel cost and quality difference can affect the profit for each store. The results show that the consumers prefer lower-quality products to maximise profit. The normal store wants higher travel costs, but outlets want lower to maximise their profit.