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Maximum or Minimum Differentiation? An Empirical Investigation into the Location of Firms

Author

Listed:
  • Janet S. Netz

    (Purdue University)

  • Beck A. Taylor

    (Baylor University)

Abstract

We empirically test some implications from location theory using the location of Los Angeles area gasoline stations in physical space and in the space of product attributes. We consider the effect of demand patterns, entry costs, and several proxies for competition -- the total number of stations, the proportion of independent stations, and the proportion of same-brand stations in a market -- on the tendency for a gasoline station to be physically located more or less closely to its competitors. Using an estimation procedure that controls for spatial correlation and controlling for market characteristics as well as non- spatial product attributes, we find that firms locate their stations in an attempt to spatially differentiate their product as general market competition increases. In other words, the incentive to differentiate in order to soften price competition dominates the incentive to cluster locations to attract consumers from rivals. We also find that spatial differentiation increases as stations become more differentiated in other station characteristics.

Suggested Citation

  • Janet S. Netz & Beck A. Taylor, 1998. "Maximum or Minimum Differentiation? An Empirical Investigation into the Location of Firms," Industrial Organization 9812003, EconWPA.
  • Handle: RePEc:wpa:wuwpio:9812003
    Note: Type of Document - Tex; prepared on IBM PC - EmTeX; to print on pdf; pages: 29
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    File URL: http://econwpa.repec.org/eps/io/papers/9812/9812003.pdf
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    Cited by:

    1. Borenstein, Severin & Netz, Janet, 1999. "Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 611-640, July.
    2. Darlene Chisholm & George Norman, 2012. "Spatial competition and market share: an application to motion pictures," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 36(3), pages 207-225, August.
    3. Darlene C. Chisholm & George Norman, 2002. "Spatial Competition and Demand: An Application to Motion Pictures," Discussion Papers Series, Department of Economics, Tufts University 0216, Department of Economics, Tufts University.
    4. Salvanes, Kjell G. & Steen, Frode & Sorgard, Lars, 2005. "Hotelling in the air? Flight departures in Norway," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 193-213, March.

    More about this item

    Keywords

    product differentiation; spatial theory; location theory; retail gasoline;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General

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