Can islands profit from economies of density? An application to the retail sector

This paper examines the additional costs borne by retailers whose strategy relies upon the exploitation of density economies when they decide to expand their network in an island. Insularity implies indeed being a non-connected node in the network, thus preventing economies of density to be entirely exploited. On this regard, such a discontinuity would entail lower profits due to a reduced efficiency in the distribution network. Starting from real data regarding an Italian large retailer, we evaluate the extent to which insularity represents a threat for the exploitation of economies of density by the retail industry. In this respect, the Italian peculiar geographical configuration makes it an interesting case study. The main finding is that while stores located in the mainland are interested by a progressive reduction of transport costs, Sardinia, which is a remote island, is not interested by such a pattern. Indeed, a contiguous distribution network helps lowering distances covered to make deliveries, thus reducing the burden represented by distribution costs. On this regard, geographical permanent features connected to insularity- such as low accessibility and small size prevent retailers to expand their network in an island, thus lowering competition and affecting consumers welfare.