Demand Externalities from Co-Location
We illustrate an approach to measure demand externalities from co-location by estimating household level changes in grocery spending at a supermarket among households that also buy gas at a co-located gas station, relative to those who do not. Controlling for observable and unobserved selection in the use of gas station, we ﬁnd signiﬁcant demand externalities; on average a household that buys gas has 7.7% to 9.3% increase in spending on groceries. Accounting for diﬀerences in gross margins, the proﬁt from the grocery spillovers is 130% to 150% the proﬁt from gasoline sales. The spillovers are moderated by store loyalty, with the gas station serving to cement the loyalty of store-loyal households. The grocery spillover eﬀects are signiﬁcant for traditional grocery products, but 23% larger for convenience stores. Thus co-location of a new category impacts both inter-format competition with respect to convenience stores (selling the new category) and intra-format competition with respect to other supermarkets (selling the existing categories).
Sen, Boudhayan; Shin, Jiwoong; and Sudhir, K., "Demand Externalities from Co-Location" (2012). Cowles Foundation Discussion Papers. 2209.