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Do business density and variety determine retail performance?

Author

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  • Esteban-Bravo, Mercedes
  • Múgica, Jose M.
  • Vidal-Sanz, Jose M.

Abstract

Outlet location plays a crucial role in retail strategy. In this paper we study the relationship between spatial density (concentration) of retailers in the trade area and their economic performance. This analysis will help managers figure out the economic potential of starting a retail business in a given area, reducing business start-up risks. We find that retail businesses located in high and low retail density zones enjoy higher performance levels, consistent with competitive advantage arising from agglomeration economies and local market power respectively. We also find that retail businesses located in intermediate density areas use a differentiation strategy based on business variety (diversification across stores). Outlets located in areas with the highest variety enjoy performance levels similar to those achieved in the agglomeration and low density areas. The results suggest that retail companies should jointly consider variety and density to determine location.

Suggested Citation

  • Esteban-Bravo, Mercedes & Múgica, Jose M. & Vidal-Sanz, Jose M., 2006. "Do business density and variety determine retail performance?," DEE - Working Papers. Business Economics. WB wb065817, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:wb065817
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    References listed on IDEAS

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    1. B. Curtis Eaton & Richard G. Lipsey, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(1), pages 27-49.
    2. Tal Garber & Jacob Goldenberg & Barak Libai & Eitan Muller, 2004. "From Density to Destiny: Using Spatial Dimension of Sales Data for Early Prediction of New Product Success," Marketing Science, INFORMS, vol. 23(3), pages 419-428, August.
    3. Frenkel Ter Hofstede & Michel Wedel & Jan-Benedict E.M. Steenkamp, 2002. "Identifying Spatial Segments in International Markets," Marketing Science, INFORMS, vol. 21(2), pages 160-177, July.
    4. Kumar, V. & Karande, Kiran, 2000. "The Effect of Retail Store Environment on Retailer Performance," Journal of Business Research, Elsevier, vol. 49(2), pages 167-181, August.
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    Cited by:

    1. Ion Purcaru, 2009. "Optimal Diversification in Allocation Problems," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(26), pages 494-502, June.
    2. Wieland, Thomas, 2014. "Räumliches Einkaufsverhalten und Standortpolitik im Einzelhandel unter Berücksichtigung von Agglomerationseffekten: Theoretische Erklärungsansätze, modellanalytische Zugänge und eine empirisch-ökonome," MPRA Paper 77163, University Library of Munich, Germany.

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