Geographic industry concentration and asymmetric cost behavior

Abstract

This research diverges from the existing literature on cost stickiness by examining the relationship between a firm's geographic proximity to industry peers, termed industry co-location, and its asymmetrical cost behavior. We propose that managerial decisions regarding resource adjustment are influenced by the state of resource markets in the firm's vicinity, hypothesizing that a high concentration of industry peers triggers downward asset price spirals during simultaneous resource liquidation. Additionally, we anticipate that industry-wide demand exceeding fixed capacity exacerbates congestion costs, thereby diminishing bargaining power in local resource markets. We predict that heightened resource adjustment costs linked to industry co-location discourage managers from reducing capacity commitments, thereby increasing cost stickiness. Our findings support this prediction, demonstrating a positive association between industry co-location and cost stickiness. Moreover, we observe that cost stickiness intensifies when closely located industry peers experience declines in sales. This paper provides initial evidence illuminating the impact of industry co-location on cost stickiness and suggests managerial implications to prevent costlier capacity adjustment through local resource markets.