Identifying Neighborhood Effects among Firms: Evidence from location lotteries of the Tokyo Tsukiji fish market

The theories of retail cluster formation suggest that stores perform better when surrounded by other stores of diverse complementary products because diverse stores attract consumers with love of variety preference. We analyze the impact of the diversity of neighboring stores among intermediate wholesalers located in the Tokyo Tsukiji Fish Market by exploiting a unique feature of their shop locations within the market in which their locations are determined every 4-10 years by relocation lotteries, generating exogenous variation in the diversity of neighboring stores. First, we confirm that these intermediate wholesalers' shop locations are indeed randomly distributed. Then, we find that the diversity of the types of neighboring firms positively affect the performance of small-sized and specialized firms. We find no effect of the characteristics of close neighbors not facing the same corridor and thus not sharing the flow of shoppers. This provides evidence that our results are not due to factors other than shopping behavior, such as technology spillovers. Finally, to illustrate the general applicability of the mechanism we find, we use the Census of Commerce covering all the retailers in Tokyo to show that smaller and more specialized retailers are more likely to be located in close proximity, while larger and standardized ones are isolated. Overall, our analysis shows that the complementarity of products between specialized diverse stores is an important factor behind urban agglomeration.