Tag Archives: agglomeration economies

Economies of scale in retailing

In the previous post, I discussed how economies of scale, enabled by improvements to transportation, led to the development of segregated land uses in the 19th century. Now I’d like to focus on the various economies of scale in retailing and their implications.

The obvious benefits of larger stores and the ability to take advantage of economies of scale accrue to the retailer, of course. The larger store will likely require fewer employees per volume of goods sold. There may also be other efficiency benefits relating to things like inventory. A wider range of goods can be stocked, making the store more appealing to customers.

Economies of scale can also benefit the customers. Wider selection is in most instances a plus. I don’t know how my daughter could have constructed her science fair project, a closed-circuit wind tunnel, without Lowes and Menards. And to the extent larger stores and the attendant economies of scale reduce costs and result in lower prices, customers benefit.

Larger stores selling more goods require a larger market and as a result they will be more widely spaced. It might have been possible to have neighborhood hardware stores, but there cannot be a comparable neighborhood Home Depot.

Beyond these internal economies of scale, external economies of scale or agglomeration economies are also very important for retail land use patterns. Some types of retailers choose to cluster with other similar outlets because customers are attracted by the opportunity to comparison shop. Other businesses locate near larger retailers to take advantage of the customer traffic they generate. This can be within a development, whether it is a large shopping center anchored by department stores or a smaller neighborhood center anchored by a supermarket. Or it can take place simply by locating in the vicinity of the larger, traffic generating businesses, whether in central business districts or outlying retail areas. In either case, the product is larger areas of segregated land uses.