This paper studies the role of consumer information frictions in driving firms’ location choices within cities. I develop a quantitative equilibrium model in which imperfectly informed consumers prefer searching in high-density locations to minimize the cost of gathering information. When choosing location, firms trade-off consumers’ preferences for agglomeration, fiercer competition induced by spatial proximity, and lower production costs from supply-side externalities. I estimate the model using bespoke data that I collected from garment firms in Kampala. I combine transaction data (to estimate demand), customer data (to shed light on search) and mystery shoppers data (to measures quality). I find that information frictions lead to substantial agglomeration and limit the ability of high-quality firms to attract customers, allowing lower-quality competitors to survive. Counterfactual scenarios show that the introduction of an e-commerce platform induces a large share of firms to disperse, while also causing customers to shift to high-quality businesses. By contrast, commonly adopted decongestion policies that discourage central clusters without solving information frictions disproportionately harm high-quality firms by increasing consumers’ costs of finding high-quality products.
