Retail Clusters in Developing Economies
Xuying Zhao, Arthur Lim, Hong Guo, Chao Ding, and Jeannette Song. Forthcoming. “Retail clusters in developing economies,” Manufacturing & Service Operations Management.
30 Pages Posted: 19 Apr 2016 Last revised: 3 Sep 2017
Date Written: July 21, 2017
We develop a game-theoretic model to explore why retail clusters are so popular in developing economies and when governments should facilitate the formation of retail clusters to improve social welfare. First, we find two determinants of retailer clusters: valuation-cost ratio (consumers' maximum valuation over retailers' production cost) and retailer density (the number of retailers over unit transportation cost). These two determinants indicate retailers' profit potential and competition intensity, respectively. Second, the equilibrium cluster size increases in the valuation-cost ratio. This finding explains the phenomenon that clusters are usually larger in developing economies (where numerous retailers sell unrecognized brands with low profit potential) than in developed economies. Third, when the retailer density of a product market exceeds a certain threshold, the market coverages of clusters overlap with each other (i.e., the overlapping case). Furthermore, when compared to the non-overlapping case, the equilibrium cluster size in the overlapping case is larger for low-profit-potential products but smaller for high-profit-potential products. Together, valuation-cost ratio and retailer density define four types of clusters: overlapping massive clusters, non-overlapping large clusters, non-overlapping small clusters, and overlapping mini clusters. Finally, the socially optimal cluster size is larger than the equilibrium cluster size, and the gap between these two cluster sizes decreases in the valuation-cost ratio.
Keywords: Retail clusters; developing economies; valuation uncertainty; valuation-cost ratio; retailer density; transportation cost
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