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Retail clusters in developing economies

Publication ,  Journal Article
Zhao, X; Lim, A; Guo, H; Ding, C; Song, JS
Published in: Manufacturing and Service Operations Management
January 1, 2019

We develop a game-theoretic model to explore why retail clusters are so popular in developing economies and when governments should facilitate the formation of retail clusters to improve social welfare. First, we find two determinants of retailer clusters: the valuation-cost ratio (consumers’ maximum valuation over retailers’ production cost) and retailer density (the number of retailers over unit transportation cost). The valuation-cost ratio and retailer density indicate retailers’ profit potential and competition intensity, respectively. Second, the equilibrium cluster size increases in the valuation-cost ratio. This finding explains the phenomenon that clusters are usually larger in developing economies (where numerous retailers sell unrecognized brands with low profit potential) than in developed economies. Third, when the retailer density of a product market exceeds a certain threshold, the market coverages of clusters overlap with each other (i.e., the overlapping case). Furthermore, when compared with the nonoverlapping case, the equilibrium cluster size in the overlapping case is larger for low-profit-potential products but smaller for high-profit-potential products. Together, valuation-cost ratio and retailer density define four types of clusters: overlapping massive clusters, nonoverlapping large clusters, nonoverlapping small clusters, and overlapping mini-clusters. Finally, the socially optimal cluster size is larger than the equilibrium cluster size, and the gap between these two cluster sizes decreases in the valuation-cost ratio.

Duke Scholars

Published In

Manufacturing and Service Operations Management

DOI

EISSN

1526-5498

ISSN

1523-4614

Publication Date

January 1, 2019

Volume

21

Issue

2

Start / End Page

452 / 467

Related Subject Headings

  • Operations Research
  • 4901 Applied mathematics
  • 3509 Transportation, logistics and supply chains
  • 1505 Marketing
  • 1503 Business and Management
  • 0102 Applied Mathematics
 

Citation

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ICMJE
MLA
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Zhao, X., Lim, A., Guo, H., Ding, C., & Song, J. S. (2019). Retail clusters in developing economies. Manufacturing and Service Operations Management, 21(2), 452–467. https://doi.org/10.1287/msom.2017.0663
Zhao, X., A. Lim, H. Guo, C. Ding, and J. S. Song. “Retail clusters in developing economies.” Manufacturing and Service Operations Management 21, no. 2 (January 1, 2019): 452–67. https://doi.org/10.1287/msom.2017.0663.
Zhao X, Lim A, Guo H, Ding C, Song JS. Retail clusters in developing economies. Manufacturing and Service Operations Management. 2019 Jan 1;21(2):452–67.
Zhao, X., et al. “Retail clusters in developing economies.” Manufacturing and Service Operations Management, vol. 21, no. 2, Jan. 2019, pp. 452–67. Scopus, doi:10.1287/msom.2017.0663.
Zhao X, Lim A, Guo H, Ding C, Song JS. Retail clusters in developing economies. Manufacturing and Service Operations Management. 2019 Jan 1;21(2):452–467.

Published In

Manufacturing and Service Operations Management

DOI

EISSN

1526-5498

ISSN

1523-4614

Publication Date

January 1, 2019

Volume

21

Issue

2

Start / End Page

452 / 467

Related Subject Headings

  • Operations Research
  • 4901 Applied mathematics
  • 3509 Transportation, logistics and supply chains
  • 1505 Marketing
  • 1503 Business and Management
  • 0102 Applied Mathematics