Agglomeration or separation: Store patterns through an optimal location model

The purpose of this paper is to show how different location patterns of stores emerge as a result of competition between retailers selling similar goods. Our model assumes the interactions between stores arise from the customer’s behavior. Two aspects were taken into account in characterizing customer’s choices: first, that the decisions depend on the total expected cost of buying the product under consideration; second, that there is consumer heterogeneity in regards to the reservation price each is willing to pay for each good. Retailers choose location and price as to maximize their total profit. Numerical evaluations show that reservation price distributions are determinant in the optimal location and in the behavior of equilibrium prices, which can increase, decrease or have a non monotonic behavior as the number of stores at the same location increases.