Cluster Effect - Generalization

Generalization

The cluster effect can be more easily perceived in any urban agglomeration, as most kinds of commercial establishments will tend to spontaneously group themselves by category. Shoe shops (or clothes shops), for instance, are rarely isolated from their competition. Instead, it is much more common to find whole streets of them, even though there is hardly a reason for the grouping in that specific region.

The cluster effect is similar to (but not the same as) the network effect. It is similar in the sense that the price-independent preferences of both the market and its participants are based on each one's perception of the other rather than the market simply being the sum of all its participants' actions as is usually the case. Thus, by being an effect greater than the sum of its causes, and as it occurs spontaneously, the cluster effect is a usually cited example of emergence.

Governments and companies often try to use the cluster effect to promote a particular place as good for a certain type of business. For example, the city of Bangalore, India has used the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, the city of Las Vegas has benefitted through the cluster effect of the gambling industry.

The cluster effect does not continue forever though. Its relative influence is also dictated by other market factors such as expected revenue, strength of demand, taxes, competition and politics. In the case of Silicon Valley as stated above for example, increased crowding in the valley led to severe shortage of office and residential space which in turn forced many companies to move to alternative locations such as Austin, Texas and Raleigh-Durham, North Carolina, even though they would have liked to stay in the valley. Much work has been done on attempting to identify economic clusters. Statistical methods have been used with a great deal of success. But the underlying problem often faced is the semantics involved in the subject, with many different authors citing numerous characteristics of a cluster.