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CONSUMER SEARCH AND FIRM AGGLOMERATION:
IMPERFECT INFORMATION, HETEROGENEOUS
SEARCH COST, AND TWO-STEP SEARCHING
BY
THANIN WANGVEERATHANANON
A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF
THE REQUIREMENT FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY (ECONOMICS)
(ENGLISH LANGUAGE PROGRAM)
FACULTY OF ECONOMICS
THAMMASAT UNIVERSITY
ACADEMIC YEAR 2013
CONSUMER SEARCH AND FIRM AGGLOMERATION:
IMPERFECT INFORMATION, HETEROGENEOUS
SEARCH COST, AND TWO-STEP SEARCHING
by
Thanin Wangveerathananon
A dissertation submitted in partial fulfillment of
the requirement for the degree of
Doctor of Philosophy
(Economics)
Faculty of Economics, Thammasat University
Bangkok, Thailand
July 2014
Is here by approved:
Chairman, Dissertation Committee:
Advisor, Dissertation Committee:
4£~ ~
" ' ( ; o f kArayah Preechametta)
Member, Dissertation Committee:
Member, Dissertation Committee:
(Dr. Pacharasut Sujarittanonta)
Dean:
(Prof. Dr. Sakon V aranyuwatana)
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To Lao Jek,
for all of his bless for me.
To all my teachers,
for setting me to the path of an economists.
To my family,
for their unconditional love and support.
To Puay,
for the love of my life.
And to the world,
for being such a good place to live.
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ABSTRACT
Conventional microeconomics concludes that firms prefer high demand
but low competition, however, many locations where firms selling a homogeneous
product agglomerate in are evidenced. When the consumers have imperfect
information regarding the selling locations and location search is prohibited, each
location is identical to them and they random uniformly for a location to visit. When
the number of locations increases, the expected demand in each location decreases
which creates demand uncertainty in each location. The existence of an operating
store in a particular location guarantees that it has a sufficient demand to sustain its
business. An entering firm selling a similar product must consider the tradeoff
between locating in the same location as the existing store and face a direct
competition or locating in other areas with low competition but uncertain demand.
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, firms in location with uncertain demand can coexist with firms in
location with a certain demand.
Due to the simplicity of Burdett and Judd (1983), the number of
competing firms has no effect on the equilibrium price distribution and expected
price. In chapter two, heterogeneous search cost is introduced to create heterogeneity
in search behavior between the two groups of consumers. Local consumers have low
search cost and compare price more intensively than the foreign who have high search
cost. As a result, the location with higher number of local consumers has lower
expected price. This finding has a negative effect on agglomeration since lower
expected price discourage firms from locating in the location with high number of
local consumers.
Chapter three introduces the density dependent search cost, that lowers
cost per price sample in the location with higher density of firms, into the model in
chapter one. Lower cost per price sample intensifies the consumers’ price search
behavior and increases the degree of price comparison. Consequently, the number of
firms has an effect on the price distribution such that higher number of firms lowers
the expected price. The consumers’ location distribution is endogenized using the two
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steps searching, which is a search method that doubles the process of non-sequential
search. In the first step, consumers sample for a highest expected utility location from
the utility distribution derived from the outcome of the second step, where consumers
sample for a lowest price firm from the price distribution of the arrival location. As a
result, the consumers’ location distribution is a function of the firms’ location
distribution. Firm agglomeration in a particular location creates a popularity of that
location since it increases the number of the optimal location sample which increases
the probability that its location will be discovered. The equilibrium location
distribution of the consumers and firms is obtained using numerical analysis.
JEL Classification: C72, D43, L10, L13, R12, R32
Keywords: agglomeration, imperfect information, price dispersion, spatial economics,
non-cooperative games
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