Imperfect Consumer Information and Firm Agglomeration
Keywords:
agglomeration, imperfect information, price dispersion, spatial economics, non-cooperative gameAbstract
Conventional microeconomics concludes that firms prefer high demand but low competition. However, in many locations where firms sell a homogeneous product agglomerates are evidenced. When consumers have imperfect information about selling locations and location search is prohibited, each location is identical so they choose a location to visit randomly. When the number of locations increases, the expected demand in each location decreases, creating demand uncertainty in each location. The existence of an active store in a particular location guarantees that it has sufficient demand to sustain business. Anew firm selling a similar product must consider the tradeoff between choosing a location with certain demand but high competition or locations with uncertain demand but possible low competition. This tradeoff is the main study of this paper. If the number of locations exceeds the threshold level, all firms are willing to agglomerate in the location with a certain demand. Otherwise, a location with uncertain demand can coexist with agglomerated location.
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