The clustering effect is a positive phenomenon that benefits both consumers and merchants by providing more choices, which in turn stimulates the overall market and increases consumer satisfaction.
If you go to a market or department store, you’ll see a cluster of stores selling the same item. It’s easy to assume that such a cluster of stores will increase competition and reduce the amount of goods sold. However, this is actually not the case. In fact, it’s actually beneficial because it allows them to sell more products. This phenomenon is called the “clustering effect” in economics, and it explains why it’s beneficial for both consumers and merchants to have a cluster of similar businesses in a certain area. So how can a cluster of stores sell more products than a single store?
First, the clustering effect increases choice by giving consumers more options. Consumers can compare products at different stores, giving them the opportunity to buy better quality goods at a lower price. This increases consumer confidence in the neighborhood, which naturally leads to more customers.
Second, a cluster of similar stores helps consumers perceive the area as a “specialty district”. For example, if there are several computer stores in one area, consumers perceive the area as a “center for buying computers,” and when they want to buy a computer, they go there. This increased trust and expertise in a particular product attracts more consumers to the area, which in turn increases sales for the individual stores.
Since buying a product without information about it can be damaging, rational consumers want to make informed purchases. Therefore, consumers spend money to seek out information and gain benefits from this information. This is the benefit of getting the same product at a lower price or getting a better quality product at the same price. The problem is that the act of searching for information costs money, so we need to decide how much information to search for.
Imagine that a person buys a computer, and by searching for one unit of information at a cost of 10,000 won, they get it for 30,000 won less than the original price. The consumer has made a profit of 20,000 won by exploring one unit of information. This is a large profit because the consumer went from having no information about computers to having information for the first time. However, if the consumer searches for one more unit of information, the situation is different because the more information the consumer has, the better they know about the product, so the cost of searching for information that is more useful than the current information increases, while the additional profit decreases. So the cost of searching for the second piece of information increases from $10 to $20, and the savings decreases from $30 to $20. In this case, the consumer will not engage in further information seeking behavior.
In addition, when stores are clustered together, merchants are aware of each other’s existence, which naturally promotes competition. This forces merchants to strive to provide better service and quality, which in turn creates a better buying experience for consumers. A satisfying shopping experience keeps consumers coming back to the area, which benefits merchants as well.
In the end, the clustering of similar stores doesn’t just lead to competition, but to positive influences on each other that contribute to the revitalization of the entire market. It’s a phenomenon that’s not only supported by economic theory, but also by real-world experience, and it’s a win-win for both consumers and merchants.
