The underlying force for creating specialized areas in the cities of developing economies

Question

Big cities in developing countries often have streets or quarters that specialize in selling a particular type of good like: books, musical instruments; or giving a specialized service like: haircuts, selling coffee. A prominent example would be the capitals like Hanoi or Bangkok.

This almost never happens in cities in developed countries. Barcelona, Spain for example has its services, shops and even supermarkets distributed uniformly along its blocks.

1. How to explain it in simple terms?
2. Is there any economic model that could effectively describe and explain the phenomenon?

Answer 1

This is an interesting observation that has produced a lot of theoretical and empirical research in industrial organization. In fact this phenomenon also occurs in developed economies, for example with gas stations. It is also not limited to location, the broader questions being why competitors in many markets tend to produce very similar products when they could also choose to differentiate themselves more strongly. A special case of the question is also often applied to politics, where the question is why different parties tend to be very similar to each other (most of the time).

Most simple explanations are based on an old and simple game theoretic model by Harold Hotelling called the Hotelling model or linear city model. Applied to politics, this model is behind the predictions of the median voter theorem.

You can find a very good explanation of the reasoning behind the model in the links below:

http://mindyourdecisions.com/blog/2008/03/25/game-theory-tuesdays-hotelling%E2%80%99s-game-or-why-gas-stations-have-competitors-nearby/ https://en.wikipedia.org/wiki/Location_model#Hotelling.27s_Location_Model https://en.wikipedia.org/wiki/Hotelling's_law