How Much Internal Agglomeration is Good in a Mediated Expansion?

Abstract

While strategic management research has put lots of effort into understanding the battle between the positive and the negative implications of geographical agglomerations, it has mostly been focused on the co-location of independent firms – external agglomeration. The implications of internal agglomerations remain underexplored. Even less attention has been paid to contexts, where agglomerations are mediated by independent firms. Platform markets and franchising firms are common examples. In those cases, the platform owner or the franchisor is making the agglomeration decisions, whereas private vendors/franchises are the ones who directly face their consequences. This is a problem since we do not know whether their interests are aligned. Building on the organizational ecology literature, we argue that a conflict of interest exists but mostly applies to the early expansion stages. We also discuss how spacing the entries in time and geography can mitigate it. We analyze our arguments using 5,955 market entry decisions made by an international money transfer platform organized as a franchising network while entering 426 metropolitan areas in 11 countries in 14 years (2001-2015). The implications for theory and practice are discussed.