Comparison Shopping and the Clustering of Homogeneous Firms*

Abstract

In his famous 1929 article on duopoly in space, Hotelling [15] explained why two competing duopolists would locate together in the center of the market rather than adopting the socially optimal, transport minimizing locations. Local clustering of firms is a matter of common observation in many markets, and it is part of the conventional wisdom of economists to refer to Hotelling and to the socially wasteful nature of clustering whenever local clusters are encountered in the real world. Boulding has contributed to this conventional wisdom by laying sweeping claims for the applicability of Hotelling's model. After explaining the workings of the model he goes on to observe: This is a principle of the utmost generality. It explains why all the dime stores are usually clustered together, often next door to each other; why certain towns attract large numbers of firms of one kind; why an industry, such as the garment industry, will concentrate in one quarter of a city. It is a principle which can be carried over into other "differences" than spatial differences. The general rule for any new manufacturer coming into an industry is "make your product as like the existing products as you can without destroying the differences." It explains why all automobiles are so much alike and why no manufacturer dares make a car in which a tall hat can be worn comfortably. It even explains why Methodists, Baptists, and even Quakers are so much alike, and tend to get even more alike. 14, p. 484.1People who follow the conventional wisdom and accept statements such as those made by Boulding are assuming that Hotelling's model generalizes to a much wider set of market conditions than those covered explicitly by the model.The theoretical work on this subject does not, in fact, support Boulding and the conventional wisdom. Smithies [22] showed that when demand is responsive to delivered price, the tendency for Hotelling's duopolists to gravitate to the market's center is weakened. Papers by Lerner and Singer [ 161 and by Eaton and Lipsey [6] demonstrate that if the number of firms serving Hotelling's one-dimensional market were increased, firms would never be grouped in clusters larger than two firms, and that clustering is a necessary condition of equilibrium only at the peripheries of the market. A subsequent paper by Eaton and Lipsey [lo] demonstrates that when demand is responsive to delivered price, firms in the interior of a *This paper is a revised version of Eaton and Lipsey [7].

Can There Ever Be Too Many Options? A Meta-Analytic Review of Choice Overload

“…These factors can lead to better-informed, more confident choices (Eaton and Lipsey 1979;Hutchinson 2005). Choosing from a variety of options also meets a desire for change and novelty and provides insurance against uncertainty or miscalculation of one's own future preferences (Ariely and Levav 2000;Kahn 1995;Simonson 1990).…”

Concentration of competing retail stores

“…Let R(c) be the critical value for c > 0: i.e., if the realized willingness-to-pay of the first commodity is more than R(c), she stops searching and keeps it; otherwise she returns the commodity and continues to search with the same critical value R(c). We have the following 21 This obsevation may not be robust for a larger number of stores case, since the cluster would have a weaker competitive power against a deviating store. Actually, if n = 20, the sufficient condition in Proposition 5 is δ ≤ r * 19 − r * 1 = 0.772368.…”

“…It is because a deviating store from the cluster may not be able to attract many customers due to competition between two shopping centers (see Figure 6). 21 …”

The Persistent Effect of Geographic Distance in Acquisition Target Selection

“…In turn, firms gain from their proximity to consumers (Cadwallader, 1975;Eaton and Lipsey, 1979) and competitors (Peteraf and Shanley, 1997) and can appropriate region-level economies when they locate in close proximity to similar firms (Dudley, 1990;Jaffe, Trajtenberg, and Henderson, 1993;Krugman, 1991). Nonetheless, desirable resources often exist at distant points from a firm's current locations, such that decisions such as divestiture, operational changes, innovation, and growth have a spatial dimension (Dicken, 1971) whereby firms seek information from distant sources and choose between geographically distributed alternatives.…”