COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1850 Demand Externalities from Co-Location Boudhayan Sen, Jiwoong Shin and K. Sudhir February 2012 We illustrate an approach to measure demand externalities from
co-location by estimating household level changes in grocery spending at a supermarket
among households that also buy gas at a co-located gas station, relative to those who do
not. Controlling for observable and unobserved selection in the use of gas station, we
find significant demand externalities; on average a household that buys gas has 7.7% to
9.3% increase in spending on groceries. Accounting for differences in gross margins, the
profit from the grocery spillovers is 130% to 150% the profit from gasoline sales. The
spillovers are moderated by store loyalty, with the gas station serving to cement the
loyalty of store-loyal households. The grocery spillover effects are significant for
traditional grocery products, but 23% larger for convenience stores. Thus co-location of a
new category impacts both inter-format competition with respect to convenience stores
(selling the new category) and intra-format competition with respect to other supermarkets
(selling the existing categories). |
