Consumer Search and Firm Location: Theory and Evidence from the Garment Sector in Uganda

Working Paper
Published on 13 November 2022
Authors
Anna Vitali

Abstract

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.

Authors

Anna Vitali

University College London