Tag Archives: economies of scale

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.

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Segregation of land uses is not new

A great deal of (negative) attention has been devoted to the segregation of land uses in newly developed suburban areas in recent decades. The critique is that the development of exclusively residential neighborhoods and the segregation of commercial activities reduces opportunities for walking, requiring increased automobile use. This is sometimes portrayed as a recent phenomenon, bought on by the widespread use of the automobile.

Some perspective is in order, however. Land use segregation is hardly a product of the latter part of the 20th century. The original cause was not the use of the automobile (though transportation was critical). Rather, the initial separation of land uses in American cities dates to the 19th century.

The pre-industrial walking city at the start of the 19th century had very limited separation of different land uses. Given that interaction was limited by reasonable walking distance, different activities just could not be located that far apart.

As the industrial city emerged in the 19th centure, this changed as enterprises sought to capture the advantages of economies of scale and was made possible by improvements in transportation within the city. First the omnibus, then the horsecar, and then electric streetcars and mass transit increased the distances people could travel to work and shop. Factories increased in size and formed increasingly large industrial areas. Larger enterprises required management by concentrations of office workers. The department store emerged to provide a previously unseen variety of goods to shoppers from throughout the urban area. The offices, department stores, and related retail formed the new central business districts, another area of largely segregated land uses.

Of course not all types of establishments saw these increases in scale in the 19th century. For grocery stores, the changes came later. But this was the start of increasing sizes of enterprises, made possible by improvements in transportation, forming areas of segregated land use.