The first time I walked through a city in South Korea, the conglomerations of identical retail stores changing from street to street seemed so extreme that at times I felt it could not be real or “natural”. In one case in particular, I felt like I was in a dream landscape because I turned a corner in downtown Daegu and was confronted with store upon store, cart upon cart, alley upon alley, of nothing but apples. Not even apple products or different types of apples or apple picking equipment, or apple seeds, or apple trees or ingredients to accompany apple recipes, but merely apples. Thousands upon thousands of them.
But it didn’t end with the apples. Continue walking towards the center of Daegu and there are streets with nothing but fans, others with nothing but pipes, others a seemingly endless stretch of plastic containers or washing machines or different types of door handles. What is happening? How could this possibly make sense? Why would 1,200 stores all selling the same kitchenware or the same floor tile all want to be right next to each other? Wouldn’t they want to be as far away from their competitors as possible?? What am I not understanding here?
It turns out that while South Korea may be an extreme example of retail store conglomerations, this phenomenon is essentially universal in market-based economies. In fact, the more I thought about it, the more I realized that almost every city that I have been too has at least some degree of conglomerations of very similar or identical stores.
Interestingly, despite the ubiquitous presence of garment districts, electronics streets, butchers’ alleys, and myriad other conglomerations of hundreds or thousands of identical shops, economists have struggled to identify the forces that lead some shops to congregate and others to disperse evenly throughout an urban area. However, after reading through a few different theories about this phenomenon, I have found some ideas that make sense to me. The short version is that retail conglomerations are a type of emergent or organic phenomenon that occurs by itself without zoning or other government intervention because even though it may seem non-intuitive, it actually makes sense! Retailers are influenced by a variety of market and even social externalities and spillover effects that all lead them to congregate together. They would not do it if it did not help them make money.
The first way that I was able to understand why some stores congregate was by looking at stores that do not congregate. Most of these stores sell what economists call “low order goods” — these are things that are usually inexpensive, that are bought on a regular basis, and that are usually homogenous. Basic foodstuffs, gasoline, alcohol, cigarettes, coffee, and small restaurants or bars that sell local food are all examples of retailers offering low order goods. Consumers have no desire to travel far or compare prices for these goods so they demand that these types of stores always be close to them. In this context I think of the gas stations that may be owned by many different companies but always have the exact same products in the exact same configuration and are located about every one to two miles in urban areas in the United States. I also think of the identical café/bars with Spanish tortilla, café con leche, and cañas of beer on every corner in Spain. Because people everywhere want these items and want them close to where they live, low order goods retailers are forced to disperse evenly in a manner that roughly corresponds with population density no matter how they might otherwise want to group themselves. And that is key. Far from congregations of identical stores being the exotic outlier, it is actually even dispersal that is hard and weird. That’s what is strange. The natural state for retailers actually seems to be to congregate.
Enter high order goods. Higher order goods can definitely be expensive— they can be jewelry, smart phones, engine parts, or durable goods like appliances. These are all higher order goods. But they can also be cheap – certain specific types of hardware, rarely bought small tools, housewares — or neither (“luxury” Korean apples).
What unites high order goods is what they are not — they are not homogenous, they are not daily purchases, and consumers do not care if one of these stores is on every corner. If lower order goods are “experience goods” because they are things that I buy all the time, that I want immediately whenever I need them and that I have perfect and well worn experience with using and choosing, then higher order goods are “search goods” because they are things that I buy just rarely enough that I am almost excited or eager to search around for them. I want to be sold or convinced. I want to know what’s out there first before I make a decision.
Back in the 1920s, a researcher named Harold Hotelling thought about these different types of goods and how identical stores cluster and came up with a theory that basically said that evenly dispersing a given type of store around a city takes a lot of work and coordination and stores will only do it if consumers demand it. He said that only lower order goods would bother evenly dispersing. Absent other forces, higher order goods retailers should locate themselves essentially randomly but they cluster instead because Hotelling thought that competition actually caused the clustering (this is exactly the opposite of what my intuition would guess). Hotelling thought that competition would cause clustering because stores usually compete by trying to steal customers from each other and one way to do so is by moving your store’s physical location. For example, imagine one guy selling ice cream. He makes good business. He sells chocolate and vanilla. I want to sell ice cream too. I know this one guy already has lots of hungry ice cream eaters coming to his street corner. So, rather than trying to find another perfect place to locate my ice cream store, I decide to just set up shop right next to the first guy and sell strawberry ice cream instead. That way I get all the people that are already coming for ice cream and I can siphon off people who want a new flavor. Or, imagine that I want to sell top hats. There is this one top hat store that is constantly packed. I move in across the street and sell the exact same top hats for one dollar less. I advertise this prominently. What will eventually happen? That’s right. Ten thousand apple stores all on the same street.
Hotelling had a really good theory but subsequent researchers reasoned that clustering would occur even without stores moving together to steal customers because if a given good is not a regular necessity, consumers will be more likely to prefer searching among many different options or prices for that good. Specialty items that are not daily necessities result in consumers “shopping around.” This means that consumers will actually prefer to visit high order goods stores that are located close by stores selling similar or even identical items because they want easy access to competitors for comparison-shopping. This demand drives high order goods retailers to cluster in a way that is exactly opposite to the way that consumer demand for close access to everyday purchases drives low order goods to disperse. Indeed, every additional retailer selling the same thing on a given street feels that it can offer consumers the price, the option, or the variety that they are searching for. This then creates a self-reinforcing phenomenon because the more those retailers congregate, the more that consumers searching for that particular item (or some variety of that particular item) will travel to that particular retail congregation and only that retail congregation in order to find it. This is the logic, for example, that might drive a burger joint to locate next to a taco stand. The burger vendor figures that hungry people are already coming to the area and that some of them might glance at the taco stand’s menu only to decide that what they would really like is a burger. Of course, this same logic will drive a pizza oven to soon open up next to burger joint. Next thing you know you’ll have a kebab shack. And so on. The same logic applies even to sellers offering very similar goods. Consumers like options when shopping for only occasionally purchased items. Indeed, since consumers are only willing to travel so far or so often for a good that they would like to “shop around for”, retailers are further incentivized to congregate because those that do not congregate (those that try to “spread out”, for example, to avoid competition) will likely miss out on shoppers due to travel fatigue. Thus, consumers’ preference to access a high number of closely congregated stores when shopping for goods in which there is perceived to be a wide range of quality, price, or variety forces retailers to set up shop right next to one another.
So, high order good stores will naturally tend to congregate both to try to steal customers from each other and to take advantage of customers’ natural preference to go to congregations of stores where they can shop around. But is there an incentive for stores to congregate even absent consumer preference and absent retailers’ desire to steal customers? Yes! On the supply side, retailers congregate because they feel that they are able to benefit from the pricing information, social benefits, ability to specialize, and access to specialists that congregation affords. Just the other day I went to a street filled with nothing but kebab shacks (which is still a little eerie to experience even if now I have read enough to know why it “makes sense”). The restaurant I settled upon was a little disorganized and had no napkins or salsa but without hesitating, the owner went to one neighboring store for napkins and another neighboring store for salsa. Congregating has many benefits like these for similar retailers. They can “outsource” their prices by copying the prices of the shops already around them, they can specialize by selling only one particular variety of a certain product, and they can have easy access to a large pool of nearby specialists and colleagues to help them run their businesses or pool resources. This last point about specialists is called “intellectual spillover” and it means that whether its agronomists and marketers able to go from apple shop to apple shop on the apple street, machinists able to quickly help a larger number of retailers repair and market their used tools, or doctors able to quickly go from hospitals and specialty clinics in the medical districts of cities, congregations help retailers with the specialists that they need in order to do their business. To return to the kebab shacks, imagine that for every 200 kebab shacks, there is one specialist who knows how to repair the spinning oven that the kebab meat sits on. If the kebab shacks are dispersed evenly all around town, a broken oven might mean losing an entire day’s worth of business while the owner waits for the specialist to arrive to their particular corner of the city. On the other hand, if the kebab shacks are all clustered, a repair company would be able to easily go from business to business that might need them, dramatically reducing downtimes due to broken equipment.
In the United States we do not have the large congregations of thousands of small businesses like South Korea does, but even in the U.S. we have this same phenomenon. In my research, I found that most small shops in the U.S. congregate, but only some megastores do. Big box stores may have less incentive to congregate merely to gain pricing information or to attract specialists and wholesale suppliers because they are mostly able to do these things on their own without the need to group around their competitors. So which big box stores do end up congregating and why do they do so? For reasons that are occasionally not entirely clear, research has shown that the big box stores that tend to congregate include Target and Wal-Mart, which may congregate because they attract slightly different consumer bases (they are able to specialize – think of the taco shop locating next to the burger joint) and Staples and Office Depot because they cater to consumers wanting to shop around for expensive office furniture or electronics. Interestingly, it appears that Home Depot and Lowes do not congregate. Maybe these stores neither differentiate enough to attract slightly different consumer bases like Target and Wal-Mart nor carry enough search intensive goods that would motivate consumers to visit both stores before making a purchasing decision. Or maybe Home Depot and Lowes’ goods are homogenous enough that consumers prefer to have a store close to them the way they do supermarkets, rather than have them clustered for easy comparison-shopping? Big box stores carry so many goods that the reasons why some congregate and others do not are not as easy to discern as with small shops selling a single type of item.
So why congregate? As it turns out, the better question actually is, why not congregate? Although at first glance, it seems to make absolutely no sense why refrigerator vendors or air conditioner repairers would all want to be together on the same street, it turns out that there are deep and even non-intuitive reasons that these things turn out the way they do. These weird Korean streets with nothing but machines for making noodles or different shapes and sizes of hair trimming tools or thousands upon thousands of gardening pots are actually not some strange habit of exotic East Asians but instead a pure example of the marketplace in action.