Journal Article Consumer Investment in Product-Specific Capital: The Monopoly Case Get access Thomas J. Holmes Thomas J. Holmes University of Wisconsin Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 105, Issue 3, August 1990, Pages 789–801, https://doi.org/10.2307/2937899 Published: 01 August 1990

The rollout of Wal-Mart store openings followed a pattern that radiated from the center outward, with Wal-Mart maintaining high store density and a contiguous store network all along the way. This paper estimates the benefits of such a strategy to Wal-Mart, focusing on the savings in distribution costs afforded by a dense network of stores. The paper takes a revealed preference approach, inferring the magnitude of density economies from how much sales cannibalization of closely packed stores Wal-Mart is willing to suffer to achieve density economies. The model is dynamic with rich geographic detail on the locations of stores and distribution centers. Given the enormous number of possible combinations of store-opening sequences, it is difficult to directly solve Wal-Mart's problem, making conventional approaches infeasible. The moment inequality approach is used instead and works well. The estimates show the benefits to Wal-Mart of high store density are substantial and likely extend significantly beyond savings in trucking costs.

Theory suggests that vertical disintegration should be greater in areas where industries localize. This paper provides some evidence that this implication is true for the U.S. manufacturing sector. Purchased inputs as a percent of the value of output is used as a measure of vertical disintegration. To measure the localization of industry, for each manufacturing plant the amount of employment in neighboring plants in the same industry is determined.

In recent years there has been great interest in economic geography (e.g., Paul Krugman, 1991). A central theoretical result from this literature is that if the population increases at a location, there will be an increase in the variety of differentiated goods produced at the location. In these analyses, the number of different varieties at a location is the key margin. This paper (which summarizes work in Holmes [1998]) highlights a second margin that the previous literature has ignored. It argues that this second margin should be incorporated into the analysis because it will help to explain an empirical relationship. This second margin is the scale of local production of particular differentiated goods. An increase in population will increase the scale of production of existing locally produced goods, in addition to increasing the variety of such goods. The empirical relationship that holds for certain industries is a convexity in the relationship between local production and population. The existing literature has ignored this second margin because it has focused on the Dixit-Stiglitz model of monopolistic competition (Avinash K. Dixit and Joseph E. Stiglitz, 1977). In the way this model is usually implemented, the equilibrium output of any particular locally produced differentiated product is independent of local population. As population increases, total local production expands by adding new varieties; the scale of production of any existing product remains fixed. This is an implausible implication. It is reasonable to expect that the output of existing products would increase. This paper departs from the Dixit-Stiglitz formulation to incorporate this second margin. A general requirement of the Dixit-Stiglitz formulation is that the elasticity of substitution between differentiated inputs exceed 1. A key feature of my formulation is a low elasticity of substitution; in fact, I look at a special case where it is zero (Leontief). This limits the tendency to substitute variety for quantity of particular differentiated inputs. To see the basic idea, suppose output in a particular industry (e.g., grocery wholesaling), is a composite of 10 different specialized inputs (e.g., vegetable wholesaling, fish wholesaling, etc.). The technology is Leontief so that to make one unit of the wholesaling composite, one unit of each of the 10 differentiated inputs is required. In a small town, there may be local production of perhaps only two specialist inputs. For example, the small town may have a local vegetable wholesaler and a packaged-goods wholesaler, but not a fish wholesaler, not a candy wholesaler, and so on. For this town, required vegetable and required packaged-goods wholesaling services will be acquired locally, while the needed fishwholesaling services will be imported from somewhere else. In contrast, a large city may be of sufficient scale to have many different inputs produced locally. For the purpose of later discussion, I will assume that a particular large city has seven out of the 10 different inputs provided locally. Adding people to a location increases the variety of locally produced goods, as in the standard model. But there is also a second effect: adding people increases the scale of production of the existing products. If the vegetable-wholesaling product is initially provided locally, then adding an additional person will increase the output of local vegetable wholesaling because this new person will want vegetables! The reason why adding this second margin is an interesting thing to do is that it provides a nice explanation for why there might exist a convex relationship between local industry production and population (I discuss the empirical basis for this relationship below). * Department of Economics, University of Minnesota, Minneapolis, MN 55455, and Federal Reserve Bank of Minneapolis. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

This paper examines how manufacturers locate sales offices across cities. Sales office costs are assumed to have four components: a fixed cost, a frictional cost for out‐of‐town sales, a cost‐reducing knowledge spillover related to city size, and an idiosyncratic match quality for each firm‐city pair. A simple theoretical model is developed and is estimated using data from the Census of Wholesale Trade. The factors emphasized in the home market effect literature, namely, fixed costs and frictional costs, are found to play an important role in location decisions. Match quality also matters. The results for knowledge spillovers are mixed.

This paper provides new evidence that state policies play a role in the location of industry. The paper classifies a state as probusiness if it has a right‐to‐work law and antibusiness if it does not. The paper finds that, on average, there is a large, abrupt increase in manufacturing activity when one crosses a state border from an antibusiness state into a probusiness state.

This article explores a Census Bureau survey of the small business sector, the 1982 Characteristics of Business Owners survey, which contains information on both small businesses and the managers running them. A number of patterns are documented. For example, among small businesses of the same age, the probability that a business fails and the probability that a business is sold are both initially decreasing in the tenure of the manager at the business. Among businesses with managers who have the same tenure at their business, the probability that a business fails is decreasing in the age of the business.

Optimal pricing by a monopoly airline that faces capacity constraints during the peak demand period is studied. The existence of capacity constraints means that in order to expand output the airline must divert demand from the peak period to the off-peak period. A particular advance-purchase discount policy is shown to be the profit-maximizing method of selling tickets. If the advance-purchase requirement were infeasible, output and total surplus would both be lower.

This paper develops a model of small business failure and sale that is motivated by recent evidence concerning how the failure and sale of small businesses vary with the age of the business and the tenure of the manager. This evidence motivates two key features of the model: a match between the manager and the business, and characteristics of businesses that survive beyond the current match. The parameters of the model are estimated, and the properties of this parametric model are studied. This analysis results in a simple characterization of the workings of the small business sector.