Tuesday, September 9, 2014

Spatial Concentration in Budapest: Why do Bridal Salons, Galleries, Banks and Fast-Food Restaurants Colocate?

Spatial Concentration in Budapest: Why do Bridal Salons, Galleries, Banks and Fast-Food Restaurants Colocate?

by Viola Monostoriné Grolmusz

When searching for your wedding dress in Budapest, you should definitely start your trip from the Grand Boulevard (Nagykörút). As almost half of all the bridal salons of Budapest are located in this concentrated area, a large variety of styles and prices can be found in a close proximity: why bother then travelling across the city to visit a single bridal salon? And what if you would like to buy a new piece of artwork? Look no further than Falk Miksa Street...

Figure 1: Bridal salons (dark blue) and jewelry stores (light blue) in Budapest (as of 2011) 

[source: Baji Péter: A City kulturális életjelenségei Budapesten]

Art galleries and bridal salons are not the only retail units that are usually located close to their competitors. We can observe a ruin pub hub along the Kazinczy Street and an agglomeration of street food places in Október 6 Street. As we can see from Table 1, jewelry stores, banks, hotels and restaurants also show a highly concentrated locational pattern. This phenomenon is not exclusive to Budapest; it is widespread in other large metropolitan areas as well. There might be several reasons for such agglomeration of economic activity. The locational choices of specialized retail units such as bridal salons and art galleries can be best explained by the Hotelling model of spatial concentration. My other examples such as the concentration of bank branches and fast-food restaurants in city centers might be better explained using theories that relax the assumptions of the Hotelling model and include inhomogeneous demand and central market theory (i.e. the fact that a location near the city center is more valuable).

number of units
average distance
from closest neighbor (m)
Jewelry stores
Bridal salons
Spar supermarkets

[source: Baji Péter: A City kulturális életjelenségei Budapesten]

To understand the conclusion that two similar stores are likely to be located near each other, let’s look at the Hotelling model briefly. Assume that there is a linear city and two competing stores, each selling a homogeneous product for the same price. Shop owners want to maximize their market shares by drawing the largest number of costumers. Consumers are distributed evenly along the line and they prefer buying the product from the nearest shop as walking to the shop is costly. If shop A settles in the middle of the street and the shop B settles at the end of the street, A will capture ¾ of the market share as for 75% of the costumers, A will be the closest store (see the upper panel of Figure 2). The owner of B therefore moves its shop just next to A in the middle of the street: this way, half of the population will choose to shop in B and half of the population will choose to shop in A (see the lower panel of Figure 2). Both shops located in the middle of the street results in an equilibrium: neither owners would like to relocate their shops, as then they would attract fewer costumers.

Figure 2: Examples for locational choices in the Hotelling Model
(the lower panel indicates the equilibrium)

The assumptions of the model are quite strong, however, its conclusions might hold for the art gallery and the bridal salon examples as these stores offer a similar set of goods and demand for wedding dresses and paintings might be homogenous across space. Moreover, neither the Falk Miksa street, nor the Grand Boulevard could be considered as ultimate city centers. If the main reason for the concentration of galleries and salons was to be close to the city center, they would likely be located in the most frequented parts of district V.

What if we consider a more life-like setup where locations have different values (having a store in central Budapest where population is dense is the most valuable for the owner as more people are expected to shop in his store) and there are more than two stores? Why is that the average distance between bank branches is only 314 meters in Budapest and why are there both a Burger King and a McDonald’s just across the street at Astoria? To get an answer to these questions, we should consider a simple game theoretic example.

Assume OTP bank and Erste bank each wants to open 5 new branches in Budapest. There are 10 possible locations that have different values: location 1 has a value of 1 (it’s far from the center), location 2 has a value of 2 and so on. This means that if OTP sets up a bank branch in location 1, it will gain an income of 1 from that branch. If both banks choose the same location, their incomes will be equally split; their incomes will therefore depend on their and their competitor’s location decision. The two banks simultaneously decide on where to set up their 5-5 branches and they want to maximize their market shares (i.e. their incomes relative to the sum of incomes).

Consider an example where OTP chooses locations 6,7,8,9,10 and Erste chooses locations 5,6,7,8,9 (they will have to split incomes at locations 6,7,8,9). Their incomes will be the following:
-          incomes of OTP: (6+7+8+9)/2 + 10 = 25
-          incomes of Erste: 5 + (6+7+8+9)/2 = 20
OTP’s market share is then: 25/(25+20)=0.56, and Erste’s market share is 0.44. Is it worth for Erste to move its branch from location 5 to location 10? We can see that its incomes won’t change:
-          incomes of OTP: (6+7+8+9+10)/2 = 20
-          incomes its of Erste: (6+7+8+9+10)/2  = 20

However, this way the market share is 50% for both banks, so Erste increases its market share in this latter setup. These strategies result in an equilibrium outcome since both banks maximize their market shares and neither has an incentive to relocate a branch as that would reduce the bank’s market share. 

For both banks, it is worth opening new branches in the same, most valuable locations: that is a likely reason why we see competing bank branches, fast-food restaurants, hotels, jewelry stores etc. so close to each other.



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