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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: http://cowles.yale.edu/sites/default/files/files/pub/d18/d1850.pdf
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    References listed on IDEAS

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    1. Dora Gicheva & Justine Hastings & Sofia Villas-Boas, 2007. "Revisiting the Income Effect: Gasoline Prices and Grocery Purchases," NBER Working Papers 13614, National Bureau of Economic Research, Inc.
    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.
    3. Edwin Leuven & Barbara Sianesi, 2003. "PSMATCH2: Stata module to perform full Mahalanobis and propensity score matching, common support graphing, and covariate imbalance testing," Statistical Software Components S432001, Boston College Department of Economics, revised 01 Feb 2018.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

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