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Demand Externalities from Co-Location

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Author Info

  • Boudhayan Sen

    (Yale School of Management)

  • Jiwoong Shin

    (Yale School of Management)

  • K. Sudhir

    ()
    (Cowles Foundation and Yale School of Management)

Registered author(s):

    Abstract

    We illustrate an approach to measure demand externalities from co-location by estimating household level changes in grocery spending at a supermarket among households that also buy gas at a co-located gas station, relative to those who do not. Controlling for observable and unobserved selection in the use of gas station, we find significant demand externalities; on average a household that buys gas has 7.7% to 9.3% increase in spending on groceries. Accounting for differences in gross margins, the profit from the grocery spillovers is 130% to 150% the profit from gasoline sales. The spillovers are moderated by store loyalty, with the gas station serving to cement the loyalty of store-loyal households. The grocery spillover effects are significant for traditional grocery products, but 23% larger for convenience stores. Thus co-location of a new category impacts both inter-format competition with respect to convenience stores (selling the new category) and intra-format competition with respect to other supermarkets (selling the existing categories).

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    File URL: http://cowles.econ.yale.edu/P/cd/d18b/d1850.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1850.

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    Length: 35 pages
    Date of creation: Feb 2012
    Date of revision:
    Handle: RePEc:cwl:cwldpp:1850

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    Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
    Phone: (203) 432-3702
    Fax: (203) 432-6167
    Web page: http://cowles.econ.yale.edu/
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    Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

    Related research

    Keywords: Revenue economies of scope; Demand externalities; One stop shopping; Co-location; Selection; Retail industry;

    This paper has been announced in the following NEP Reports:

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    1. Gicheva, Dora & Hastings, Justine & Villas-Boas, Sofia B, 2008. "Revisiting the Income Effect: Gasoline Prices and Grocery Purchases," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7087m1p6, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
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