Geography Reference
In-Depth Information
tics distance between individual producers. This increases the monopoly
brand power of each individual firm. Therefore, the greater is the distance
L
and the more brand alternatives that are available, the less will any
particular firm be adversely affected by a downwards price adjustment by
any other particular competing producer. This is because, on average, the
characteristics distance between the two firms will be greater.
If we combine these two observations, then it becomes clear that a
larger market characteristics space
L
combined with a greater number
n
of competing producers together increases the price stability and demand
quantity of the whole market. However, while increasing the number
n
of
producers has a clear meaning, what is not yet clear is how the size of the
market space
L
can be increased. For this, we must once again turn to the
issue of geography.
In terms of explicitly geographical space, if a greater number of com-
peting firms producing alternative differentiated brands are located at
the same geographical location, then the Salop arguments also imply
that more local competition between product varieties will lead to a local
market demand which is robust and stable. This is good for both pro-
ducers and consumers, and geographical clustering thereby becomes a
defence against the Bertrand problem, as long as it is also associated with
high product variety. This conclusion itself provides a partial rationale as
to why firms should cluster together in geographical space, because as a
group, the clustered firms will benefit from these stable price and demand
conditions.
In addition to the issue of price and demand stability, there is also a great
deal of theoretical work as well as empirical evidence which suggests that
consumers have an increasing preference for choice variety in general. If
consumers enjoy greater choice variety for any given level of expenditure,
this also implies that the more brand options are available at a particular
location, the higher will be the consumers' utility. Therefore, if consum-
ers know that a high degree of product variety is available in a particular
locality this itself will encourage more consumers to consume at this par-
ticular geographical location. The geographical clustering of competing
differentiated brand producers can therefore facilitate the growth of the
overall local market space, as well as providing for greater overall market
and price stability. These interrelationships between product variety, price
stability and the growth of a local market all provide a clear, preliminary
rationale as to why firms should cluster together in space. Indeed, modern
multinationals frequently locate multiple stores, showrooms or retail
outlets in the same location in a manner whereby the establishments are
explicitly designed to appear as being from quite different producers,
although in reality they are all part of the same corporate grouping. These
