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Product Variety and Firm Agglomeration

  • Jeffrey H. Fischer
  • Joseph E. Harrington Jr.

For the purpose of explaining interindustry variation in the geographic distribution of firms, we explore the impact of product heterogeneity on the incentives for firms to cluster in the presence of a ubiquitous "periphery" of stand-alone firms. Our analysis revolves around two counteracting forces. Greater product heterogeneity increases consumer search, which raises the amount of shopping at a cluster. Since this results in greater demand for a firm that joins the cluster, this effect increases the incentive to cluster. However, greater product heterogeneity gives stand-alone firms more local monopoly power. Since this raises their price-cost margins, this effect increases the incentive for a firm to stand alone. Our analysis shows that the former effect typically dominates, so that greater firm agglomeration is associated with industries characterized by greater product heterogeneity.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 2 (Summer)
Pages: 281-309

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Handle: RePEc:rje:randje:v:27:y:1996:i:summer:p:281-309
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