Love Thy Neighbor? Differentiation and Spatial Agglomeration in the Manhattan Hotel Industry

In this paper, we examine two distinct perspectives that explain entrepreneurs' choice of product and geographic location, which determine demand for the output of a start-up and the competition it faces. According to the differentiation perspective, fear of direct competition pushes firms far apart from similar competitors, while benefits of complementary differences pull firms close to dissimilar competitors. According to the agglomeration perspective, spillovers from adjacent competitors pull firms close to similar competitors. Our analysis of multidimensional founding location decisions in the Manhattan hotel industry provides evidence to support a combined perspective in which hoteliers locate new hotels sufficiently close to established hotels that are similar on one product dimension (price) to benefit from agglomeration economies, but different on another product dimension (size), to avoid localized competition and create complementary differences.