Distance decreases with differentiation: Strategic agglomeration by retailers.(Report) Picone, Gabriel A.; Ridley, David B.; Zandbergen, Paul A.

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Picone, Gabriel A. ; Ridley, David B. ; Zandbergen, Paul A.
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International Journal of Industrial Organization
Retail trade -- Analysis; Business, international; Analysis
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijindorg.2008.11.007 Byline: Gabriel A. Picone (a), David B. Ridley (b), Paul A. Zandbergen (c) Keywords: Agglomeration; Location; Differentiation; Retail; Alcohol Abstract: Theory predicts intense price competition results 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. Author Affiliation: (a) Department of Economics, University of South Florida, Tampa, FL 33620, United States (b) Fuqua School of Business, Duke University, Durham, NC 27708, United States (c) Department of Geography, University of New Mexico, Albuquerque, NM 87131, United States Article History: Received 2 January 2008; Revised 29 November 2008; Accepted 30 November 2008 Article Note: (footnote) [star] We are grateful for helpful comments from Peter Arcidiacono, Michael Lenox, Will Mitchell, Frank Sloan, an anonymous referee, and seminar participants at Duke University and Lehigh University. We thank Michael Kotarinos and Taiwo Abimbola for research assistance. We received financial support from the National Institute on Alcohol Abuse and Alcoholism (5R01 AA012162-06).
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