Agglomeration effects in economic development and spatial clustering

¶ … Agglomeration Effects and Performance: a Test of the Texas Lodging Industry," author William Chung (2001) explores how agglomeration is used by Texan lodging companies to benefit their bottom lines and increase their profits. In different industries, the location and proximity of competition has a lot to do with how profitable that company is. When there are more comparable options in a limited area for consumer's money, then the cost of the product or service is more competitive. People will likely utilize the service which provides the greatest value for their money. In an industry like lodging, when there are many places to stay in a limited area, the cost and quality of the individual businesses will impact the amount of customers who choose a given place of business. This will require those who have stakes in the area to both increase the quality of their service and to decrease the price so that the customers will choose them. In locations where there is less competition, the businesses have more freedom to choose a price point to their liking because there are no or fewer similar venues competing for the same customer. Chung (2001) sees this as a problem for industries because it lowers costs, but also asserts that there may be a benefit to the close proximity of same-service businesses.

Chung examines the lodging industry in terms of the potential benefits of close proximity agglomeration because he believes it is a business which offers similar services and that is thus more easily comparable. Location is the most important aspect in determining the agglomeration benefits. Reputation is also paramount in the potential success of the incorporation of additional locations to an established chain. According to Chung (2001), in rural areas where there are fewer hotels and motels to create competition, identification with a chain will build consumer confidence and will likely increase the amount of business, systematically doing damage to singular hotels without affiliation with chains.

In locations where there is agglomeration and competition, the potential for competition can be beneficial to companies. For example, the competition forces the various hotel companies to better themselves in terms of quality. They will have to be more focused on the consumer in order to get people to use their services. However, there is a more financially beneficial reason for agglomeration because it creates less room for consumer investigation. Often, the consumer will look at the pluses of a potential lodging place, such as the amenities available and the price in particular. They will be less likely to question the negative attributes of any given location and instead focus on the benefits of that lodging place.