Maximum or Minimum Differentiation? An Empirical Investigation into the Location of Firms

Abstract

We empirically test some implications from location theory using the location of Los Angeles area gasoline stations in physical space and in the space of product attributes. We consider the effect of demand patterns, entry costs, and several proxies for competition--the total number of stations, the proportion of independent stations, and the proportion of same-brand stations in a market--on the tendency for a gasoline station to be physically located more or less closely to its competitors. Using an estimation procedure that controls for spatial correlation and controlling for market characteristics as well as non-spatial product attributes, we find that firms locate their stations in an attempt to spatially differentiate their product as general market competition increases. In other words, the incentive to differentiate in order to soften price competition dominates the incentive to cluster locations to attract consumers from rivals. We also find that spatial differentiation increases as stations become more differentiated in other station characteristics.

JEL Classification: L22, L13, D43, L90