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Demand Externalities from Co-Location

Author

Listed:
  • Boudhayan Sen

    (Yale School of Management)

  • Jiwoong Shin

    (Yale School of Management)

  • K. Sudhir

    (Cowles Foundation and Yale School of Management)

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).

Suggested Citation

  • Boudhayan Sen & Jiwoong Shin & K. Sudhir, 2012. "Demand Externalities from Co-Location," Cowles Foundation Discussion Papers 1850, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1850
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d18/d1850.pdf
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    References listed on IDEAS

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