For example, you often see four or five gas stations in the same block, or all these restaurants clustered in a strip mall, etc. – the idea being (if I remember correctly) that customers would come to think of the area as “the gas area” or “the food area” and visit more often.
What’s the economics term for this?
I always heard that called “line-of-sight competition.” Don’t know if that’s official though.
Hotelling’s Law Hotelling's law - Wikipedia
I recall this from Econ 101. I always thought it was odd that this law assumes customers will always choose the closest store.
As you might imagine, the models you cover in econ 101 are simplified a lot to make them intelligible. That said, assuming that customers choose the closest store is probably not all that bad an approximation to what actually goes on.
I don’t think that the assumption of customers choosing the place purely on walking distance or some other such minor issue is always credible. In some cases people may also choose based on “fairness” or let’s say the desire to support the underdog competitor to keep them around to protect against monopolistic price increases in the future.
Of course. But the way you test for that is to see how much of the phenomenon (store selection) can be explained by the simplest model - only if the predictions of the simplest model fail to match the observations, do you start to look at other models (habit, fairness, etc.) to explain the deviations.
There is an area in Tysons Corner, Va., where there is a metric shitload of car dealerships. Something similar exists in Burtonsville, Md., and probably in a lot of other places. There are lots of other things to differentiate each dealer, so these areas are the “car dealership areas” so people do tend to flock there when car shopping.
I do not know how it got to be like that.
Starbucks found that they could open two stores across the street from each other and end up with double the sales overall than with just one store.
However, there is an Exxon station and a Sunoco directly across the street from each other near my house. Sometimes their prices can be several cents per gallon apart. Since gas is pretty much a commodity I’m not sure why anyone at all would go to the more expensive station, but they both seem to do a brisk business. Maybe it has to do with convenience depending on which direction the customer is going, and habit.
I’m not sure, but it sounds like you are describing something like a network externality. The more gas stations in the area, the more likely people will go to it for that service: each gas station adds to that promotional effect. According to a barber who once chatted with me, the effect is real and substantial. People will gravitate to an adjoining service business if they can’t be helped at that moment. Network effect - Wikipedia
Related concepts are studied by geographers and economists. New York City is a popular place to locate ad agencies and financial firms because… other ad agencies and financial firms are there. You can trade ideas with other specialists. Companies have a deep pool of talent to hire from, and the talent is there because there are lots of employers. Hollywood and Silicon Valley are 2 other examples.
As for Hotelling – I think that’s a model of duopoly? Doesn’t it give different results for more than 2 firms?
“district”?
As in “hotel district” or “red-light district”?
I suspect it has a bit more to do with cheap land. 103rd street in Kansas City, MO between State Line and Wornall Road is packed with new car dealers - in spite of, or possibly because, that area has been flooded five times in twenty-five years.
New York City is famous for districts, like the Meatpacking District. Chicago has an even more extreme example, the Jeweler’s Center in the Maller’s Building. For some reason, 190 different jeweler’s are in the same building. I suppose it makes it easier for Bridezilla to torture her intended victim to insanity by visiting 190 different stores.
Urban development wonks call it “retail clustering” or “service clustering”.
I’ve never heard a word for it, but I would call it “drafting”. Or “herding”, maybe.
Jane Jacobs discuses this somewhere, but mostly in the context of manufacturers (think the meatpacking in NYC or the car builders in Detroit). They do it because all the suppliers will also be located nearby.
Not only that, but they’re always prefaced with the phrase “all other things being equal.” A lot of students don’t hear that preface, and then go around thinking these “laws” are absolute at all times, using them to justify whatever they want–ignoring the reality that all other things are rarely equal.
A classic example around here is auto parks. Auto dealers will all move into the same little street or industrial park. In Mississauga you have the Erin Mills Auto Mall, which has more than half the major names - Ford, GM, Hyundai, Mitsubishi, Nissan, VW, Volvo, and so on. Clearly, although they’re competing, they benefit from the mutual draw. It’s much more appealing to me, as a consumer, to drive to one place where I can see many brands of car than drive to a place where I can only see one.
Somehow I would expect Hari Seldon to have a precise equation to predict store locations and how those locations would affect each crisis on the way to the Second Empire (allowing of course for the Mule’s radical store-location disruptions)
I’m not inclined to make two left turns across traffic. It takes longer and is higher risk. If it is just 50 cents on a tank a gas, I will ignore it. It it is a buck then I will try to time it so the cheaper station is on my side of the road. I also prefer a station after the light than before since the cars waiting for the light make it harder to get out. The best station is on a corner where you are turning right, since you can pull out on your destination street. You are also better off with a car that fills up on the right, since the line is shorter on the left side of the pump.
It’s possible that I spend too much time thinking about my gas purchase algorithm.
It may by my imagination, but when I see a new CVS store there is at least a 50-50 chance that it will open across the street from a Walgreens.
Price fixing!
**Clustering ** (and clustering theory) is one of the technical terms. It is an effect of network externalities to “agglomeration” or “clustering.” MfM provided good links.
One would presume that there is an effect of loyalty programs (cards, points given by each retailer, other promotional systems aimed at locking in the consumer), plus pure habit.
Utterly irrelevant.
Not sure exactly what the OP is looking for, but monopolistic competition may apply: