Company size and spatial localization – game theory and experimental approach Przemysław Kusztelak (spatial economist) Macjej Pogorzelski (mathematician) Tomasz Kopczewski (experimental economist) Research Seminar Warsaw,

2 Presentation Plan  Scientific hypothesis  Spatial economic literature description  New idea of including company size into a research  Presentation of special experimental tool  Model verification – experimental approach  Discussion

3 Scientific hypothesis 1) Company size has a great influence on competition level between them. 2) Exist the inverse relation between company size and their mutual distance in equilibrium: a) Large companies choose central location (Principal of Minimum Product Differentiation); b) Small enterprises sprawl to avoid competition (Principal of Maximum Product Differentiation).

4 What is Space?  Space factors concerning company location:  distance  time  age  political reasons.

5 Space example (distance)  Population density in Poland (2000) Źródło:

6 Space example (age)  Population of Poland (2005) Źródło:

7 Spatial location theory (1) Hotelling H. Stability in competition. Economic Journal 39, 1929, s. 41– 57.  NE: A=0 ; B=1  PE (social): A=0.25 ; B=0.75

8 firm 1 firm n firm 2 firm i+1 firm i-1 firm i consumer x Spatial location theory (2) Salop S.C. Monopolistic competition with outside goods. Bell Journal of Economics 10, 1979, s. 141–156.  PE: f1=0 ; f2=1/n; …; fn=(n-1)/n  NE: the same

9 Spatial location theory (3) Vendrop E., Majeed A. Diferentation in a two-dimensional market. Regional Science and Urban Economics 25, 1995, s  NE: [A=(0;0.5) ; B=(1;0.5)] [A=(0.5;0) ; B=(0.5);1]

10 Evolution of spatial location theory: Firm choice: space, price, product characteristics … Adding new uncontrolable variables: consumer distribution (uniform, triangular…), cost of transportation Results ???

11 Different firm size – treoretical model (1)  The relaxation of the full market saturation assumption (not all consumers will buy good)  Small firms:  Medium firms:  Large firms:

12 Different firm size – treoretical model (2)  The relaxation of the full market saturation assumption (not all consumers will buy good)  Small firms: brak konkurencji  Medium firms: częściowa konkurencja  Large firms: całkowita konkurencja

13 Different firm size – treoretical model  Conclusion:  Small firms pick peripheral locations. By dispersing, they divide the market between themselves and do not need to compete;  With the increase in firm size, the competition becomes stronger and the dispersion is lower;  When none of the firms is able to serve the total market demand, the maximum differentiation principle will apply;  For large firms, which are able to satisfy the total demand, competition leads to minimum product differentiation.

14 Different firm size – empirical verification (1)  Experimental approach (LabSEE – special platform )

15 Different firm size – empirical verification (2)  Experimental approach (LabSEE – special platform )

16 Different firm size – empirical verification (3)  Assumptions:  Uniform distribution of consumers;  Market saturation of small / medium-sized / large firms located at point X;  Firms sell only one homogeneous product at the same, exogenous price.

17 Different firm size – empirical verification (4)  Small firms: NE and Pareto-effective NE  Percentage of small firms in equilibrium in each round

18 Different firm size – empirical verification (5)  Medium-sized firms: NE and Pareto-effective NE  Percentage of small firms in equilibrium in each round

19 Different firm size – empirical verification (6)  Large firms: NE and Pareto-effective PE

20 Different firm size – empirical verification  Conclusion:  Experimental approach confirms this relationship exists and highlights the inverse relation between companies’ size and their mutual distance in equilibrium ;  Big companies choose central location (Principal of Minimum Product Differentiation), when small enterprises sprawl to avoid competition (Principal of Maximum Product Differentiation) ;  Psychology is yet another factor which adds to the centripetal force; it is the desire to occupy the central location and to “dominate the market”. It even happens at the expense of a part of the profits ;  For large firms, which are able to satisfy the total demand, competition leads to minimum product differentiation.

21 General conclusion  The market size and the capability to saturate the market determine product differentiation;  Globalization processes may broaden the gaps between the suburbs and the metropolis – i.e. the divergence: When large firms emerge in national markets, the resulting competition may lead to firms locating their activities in the center of the country. They will manufacture their products according to the minimum differentiation principle, which may aggravate the undesirable and adverse effects of globalization.

22 Discussion Thank You for Your Attention !