Distance Decreases with Differentiation: Strategic Agglomeration by Retailers

33 Pages Posted: 2 Dec 2008 Last revised: 9 Jan 2009

See all articles by Gabriel Picone

Gabriel Picone

Department of Economics

David B. Ridley

Duke University - Fuqua School of Business

Paul A. Zandbergen

University of New Mexico

Date Written: January 7, 2009

Abstract

Theory predicts intense price competition when firms cluster with rivals. Yet, strong evidence of clustering is found in previous empirical research. Researchers typically measure clustering by comparing observed location patterns to random assignment. The random assignment benchmark does not, however, account for zoning and geography and therefore might overstate the extent of strategic agglomeration. As evidence, we find that public elementary schools cluster more than random, not because of agglomeration economies, but due to demand density and limited location options. We argue that a better measurement of strategic agglomeration is to compare across product markets with similar zoning and other location restrictions but different benefits from agglomeration. We use L-function analysis of five product markets in five cities. We find that retailers with greater ability to differentiate their products are more likely to strategically cluster.

Keywords: agglomeration, location, differentiation, retail, alcohol

JEL Classification: L10, L81, R12, R30

Suggested Citation

Picone, Gabriel and Ridley, David B. and Zandbergen, Paul A., Distance Decreases with Differentiation: Strategic Agglomeration by Retailers (January 7, 2009). International Journal of Industrial Organization, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1309612

Gabriel Picone

Department of Economics ( email )

4202 E. Fowler Avenue
Tampa, FL 33620-5500
United States
813-974-6537 (Phone)
813-974-6510 (Fax)

HOME PAGE: http://www.coba.usf.edu/departments/economics/facu

David B. Ridley (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Paul A. Zandbergen

University of New Mexico ( email )

Albuquerque, NM 87131
United States

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