About the …rms ’ tendency to cluster

I study an economy with sellers and buyers. The sellers are capacity constrained and face stochastic demand. They have a choice of locating geographically close to each other, i.e., clustering or locating separately. In the former case the buyers can visit any of them while in the latter case the buyers can visit only one of them. The sellers post prices which are observed by the buyers who base their decision to contact sellers on the prices. I explicitly derive the equilibrium prices or price strategies in the clustered and in the non-clustered market for an arbitrary distribution of demand. I show that the clustered market often yields higher pro…ts than the non-clustered. Finally, I derive the equilibrium market structure