Coalition Building in a Spatial Economy

We analyze the possibility and consequences of coalition formation among suppliers of retail services. We first provide a framework in which producers of substitutes have an incentive to cluster in marketplaces to attract consumers dispersed in space. Owing to spatial externalities, the resulting spatial equilibrium can be welfare suboptimal. We characterize regimes in which we find too little and those in which there is too much agglomeration of firms. We analyze the role of coalitions of firms (e.g., initiated by a land developer) in this framework and show that such coalitions can overcome the suboptimality of the decentralized spatial allocation.