The recent CMF “dosas-by-the-dozen” paper, which has been the subject of much discussion in this blog, suggests that present-bias among microentrepreneurs breeds risk-aversion in enterprise choice that effectively homogenizes the type of enterprises that they pursue. Emmerichda in his earlier post suggests that this might explain why one sees clusters of STD phone booths, among other things. That reminded me of some persistent questions I’ve had regarding the spatial organization of Indian economic activity, which I’ll try to discuss in this post.
Anyone who has lived in any city in India is aware of the tendency for similar businesses to exist in clusters, rather than being evenly distributed geographically. For durable goods and non-generic services where there is variation in the quality of whatever is being provided, this seems economically logical, especially when the consumer population does not have easy access to price information for a variety of providers. This is especially true in urban india, where most people don’t have their own transportation, and even if they do its generally a pain to go from place to place, and also where the concept of advertising on the basis of price seems essentially nonexistent. Under these circumstances, there definitely seems to be an efficiency gain to the concept of a bazaar, where competition is apparent and consumers have access to a wider variety of choices. Consumers can avoid getting screwed over by monopoly providers because they have almost immediate access to all the other providers – a spatial way of ensuring that there is direct competition. This logic applies especially in the case of more expensive goods and services, particularly ones that are not necessarily perfect substitutes (ie appliances, used cars, prostitutes, furniture, etc).
Then there is another category of goods that are cheap and also perfect substitutes, but still generally appear in clusters of shops. I would put pan, cigarettes, chai, omelettes, phone calls, juice, and similar “instant-gratification” goods into this category. For these shops as well, there is a compelling reason for them to exist in clusters. The reason is that consumers themselves are present-biased regarding consumption of these goods. For example, if one pan shop always gets a glut of customers at a certain time of day, that it makes sense for another to open immediately adjacent – since consumers are present-biased and want their paan as quickly as possible, business will spread evenly between the two, and customers will get their fix twice as fast. The same is true for STD phone booths, street-food stalls, and similar goods and services. The fact that barriers to entry and fixed costs of operating these types of shops are generally minimal also suggests that it makes sense for them to exist in clusters in order to satisfy consumer’s desire for instant gratification. Higher costs of entry for providers and lower consumer preference for immediate service would intuitively reduce the tendency of these businesses to appear in clusters.
But for certain other types of goods and services, the idea of a bazaar seems downright silly. For example, I can’t think of any compelling reason why a salt bazaar or rice bazaar or dal bazaar should exist. For these types of goods, the natural equilibrium would seem to be for stores to be evenly distributed geographically to minimize consumers travel costs. Since these are basic, cheap, nondurable goods that every household consumes, the stores selling them would presumably be abundant enough to ensure price competition even when they aren’t located right next to one another. The presence of half a million ration shops across the country providing these goods at a subsidized rate for most consumers would also seem to ensure that no one shop can ever be a monopoly provider of salt, rice, etc in a region.
Yet this equilibrium doesn't really seem to exist in reality. There are salt, rice, grain, chili, and similar bazaars in every town and city I’ve been to in India. Certainly almost all of these basic staple goods are available in local kirana stores, but there is no price convergence – they are never as cheap in the kirana as in the bazaar, and the price differential is much too great to be explained simply by the cost of transporting goods to the kiranas.
Anyone who can offer a compelling explanation for this gets a kilo of sugar from me.
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