Consumer Search and Automobile Dealer Co-Location

Abstract

Retailers co-locate with rivals to take advantage of economies of agglomeration even though co-location implies greater competition. Using data on all new car transactions registered in Ohio from 2007 to 2014, we estimate a structural model of consumer search for spatially dif- ferentiated products that explicitly captures the agglomeration and competition effects of retail co-location. Search frictions generate an average of $333 per car in dealer markups. Agglom- eration implies that dealer closures could harm incumbent co-located dealers, even though the incumbent dealers would face less competition. Our results inform the recent policy debate surrounding the massive downsizing of car retail networks and highlight the role of contagion in brick-and-mortar retailing.