Product Variety and Firm Agglomeration

RAND JOURNAL OF ECONOMICS, Vol. 27, No. 2

Posted: 19 May 1998

See all articles by Jeffrey H. Fischer

Jeffrey H. Fischer

U.S. Federal Trade Commission (FTC)

Joseph E. Harrington

Johns Hopkins University - Department of Economics

Abstract

For the purpose of explaining interindustry variation in the geographic distribution of firms, this article explores the impact of product heterogeneity on the incentives for firms to cluster in the presence of a ubiquitous "periphery" of stand-alone firms. Our analysis revolves around two counteracting forces. Greater product heterogeneity increases consumer search which raises the amount of shopping at a cluster. Since this results in greater demand for a firm that joins the cluster, this effect increases the incentive to cluster. However, greater product heterogeneity gives stand- alone firms more local monopoly power. Since this raises their price-cost margins, this effect increases the incentive for a firm to stand alone. Our analysis shows that the former effect typically dominates so that greater firm agglomeration is associated with industries characterized by greater product heterogeneity.

JEL Classification: L11, L12, L13, D43

Suggested Citation

Fischer, Jeffrey H. and Harrington, Joseph E., Product Variety and Firm Agglomeration. RAND JOURNAL OF ECONOMICS, Vol. 27, No. 2, Available at SSRN: https://ssrn.com/abstract=4022

Jeffrey H. Fischer (Contact Author)

U.S. Federal Trade Commission (FTC) ( email )

600 Pennsylvania Ave., NW
Washington, DC 20580
United States
202-326-2656 (Phone)
202-326-2625 (Fax)

Joseph E. Harrington

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7615 (Phone)
410-516-7600 (Fax)

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