Coalition building in a spatial economy

We analyze the possibility and consequences of coalition formation among su ppliers of retail services. We first provide a framework in which producers of substitutes have an incentive to cluster in marketplaces to attract con sumers dispersed in space. Owing to spatial externalities, the resulting sp atial equilibrium can be welfare suboptimal. We characterize regimes in whi ch 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 la nd developer) In this framework and show that such coalitions can overcome the suboptimality of the decentralized spatial allocation. (C) 2000 Academi c Press.