Subject: Information Externalities, Car Dealers, and Spaghetti Osteopaths
From: (pk)
Date: Fri, 20 Oct 2006 10:39:34 -0500

Information Externalities, Car Dealers, and Spaghetti Osteopaths Why do some competing stores locate near one another, while others don't? In National City, south of San Diego, there is a stretch called the "Mile of Cars". I dont know if it's a mile or not, but it's pretty much an endless strip of car dealers, from  Hyundais to Hondas, and everything inbetween. There are similar areas in most reasonably-sized cities, whether a cluster of car dealers, a car strip, or just a bunch of dealer generally clustered around one another.

And it's not limited to car dealers. In Vancouver, British Columbia, there is an area south of downtown where there must be more than a half-dozen outdoor equipment stores withing a block of one another. There is a large Mountain Equipment Co-op and some other large stores, as well as smaller outfits.

But you don't see this sort of thing for all types of stores. For example, I have yet to see a cluster of grocery stores - a Mile of Groceries, say -- in any city in which I have lived or visited. I'm sure you can think of many other examples where we don't see stores herding around one another.

So, why do they do it? It's an interesting question, and one answer is that it has to do with the nature of the goods being sold. Konishi (2005) argues that in the case of car dealers it is simple probalities. Consumer value spatial concentration of car dealers because, assuming purchase probabilities are independent of dealer, then your likelihood of buying any one model (across, say, Volvo, Mercedes, BMW, and Lexus) is 1/4. As a consumer that can seem like a poor way to spend the day, unless, of course, the aforementioned four dealers cluster around one another, thus making it more likely that you'll find a model that you'll buy.

To this way of thinking, car dealers cluster because it is in their best interests to do so, given consumer behavior. Buyers would be less prone to buying if dealers were discrete and far away from one another, but they are more prone to shopping (and possibly buying) if dealers cluster around one another. Such, of course, is not generally the case with groceries, with some exceptions (i.e., here in La Jolla there is a semi-cluster with a Ralph's, Trader Joes, and Whole Foods herded around one another).

There are other explanations for store clustering, of course. Caplin and Leahy (1998) demonstrate one in their paper "Miracle on Sixth Avenue". The gist: Lower Sixth Avenue in Manhattan used to be fashionable for retail, but ceased to be some time ago when affluence moved uptown and to the suburbs. But then, however, in around 1993 the area began to turn around, with it rapidly turning into a major retail area.

Why did it happen? Caplin and Leahy argue that much of the explanation is in the 1992 arrival of Bed Bath & Beyond. It generated, they say, a search-related information externality -- whenever people search for information, their search behavior is generally influenced by what they can learn from the actions of others. This tends to generate herding phenomena, among other things. When stores saw the success of BB&Y, they relocated there, some because of the spillover effect of BB&Y's success (it re-legitimated the area), and some because they wanted to take advantage of the new and larger crowds on lower Sixth Avenue.

An interesting question is whether the same thing holds right down to the product area, like in books. There was a story recently the NY Times about the "pileup of name authors" releasing books this fall seasons, with authors like Cormac McCarthy, John Grisham, Michael Crichton, Stephen King, and Michael Connelly releasing novels. But there are also a few recluses showing up, like Thomas Harris and the recluse of all recluses, Thomas Pynchon, whose Against the Day is due in November. Granted, much of this just the usual holiday crush of new books, but this year is still unusual, with far more name authors than usual.

(An aside: I've long had a weakness for Pynchon, and I forgive him for Mason & Dixon, which may have been great, but I found calorically over-taxing sorting out the straight-outta Sotweed prose. That said, I love the Pynchon-penned blurb for his upcoming book, Against the Day. The book looks likes classic stuff, complete with cameo appearances by Bela Lugosi and Nikola Tesla, as well as some role for my favorite Siberian tree-felling episode, the Tunguska event. And, darn it all, any book that contains a spaghetti osteopath sequence like the following has to be good:
"Go on ahead, don't be shy, I'll give you ten seconds gratis, 'fore I draw. Promise." Too dazed to share entirely the gang's spirit of innocent fun, Willis slowly and inexpertly raised his revolver, trying to aim it as straight as a shaking pair of hands would allow. After a fair count of ten, true to his word and fast as a snake, Jimmy went for his own weapon, had it halfway up to working level before abruptly coming to a dead stop, frozen into an ungainly crouch. "Oh, pshaw!" the badman screamed, or words to that effect.

"Ay! Jefe, jefe," cried his lieutenant Alfonsito, "tell us it ain' your back again."

"Damned idiot, o' course it's my back. Oh mother of all misfortune--and worst than last time too."

"I can fix that," offered Willis.

"Beg your pardon, what in hell business of any got-damn punkinroller'd this be, again?"

"I know how to loosen that up for you. Trust me, I'm an osteopath."
"Trust me, I'm an osteopath". You have to love it.)

But I digress. To return to the point, is there any reason for authors to cluster, like car dealers? In other words, other than competiveness and/or a fluke of nature, is there any reason to bring out competitive Big Books around the same time?

Historically publishers have frowned on this sort of thing, arguing that consumers only have so much to spend on books, and bringing out multiple big books at the same time is a beggar thy neighbor game that doesn't play out very well. But is it true?

It is possible that once you get people into the book-buying mode that they buy more books, as well as it being more likely that they buy some book, even if they decide not to buy the book they were originally interested in. On the other hand, is there some sort of information externality at work here, with authors sensing by each other's action that this is a particularly good time to publish? Possible, but that is a little more doubtful. Writing a book is a painful and time-consuming process, so having authored a book is not that something you can generally change on short notice.

Information externalities, clustering, car dealers, and spaghetti osteopaths -- things that make you go hmmm.