Good Eats, Durham

1. Good Eats, Durham A Case Study in Urban Agglomeration Carmen Augustine April 2013

2. Introduction • Durham has changed a lot in the 4 years I have been at Duke • Most of the changes have been restaurant, bar, specialty food store openings • Why is Durham growing, and why is its economic growth concentrated in the food industry?

3. Restaurant Openings in Downtown Durham

4. Pizzeria Toro Mateo Toast Scratch BeyuCaffe Dame’s Dos Perros Loaf Revolution BCBB Tobacco Road Sports Cafe Cuban Revoultion

5. Urban Agglomeration • Urban agglomeration is the phenomenon that once a critical mass of businesses cluster in one urban area, the volume of activity alone is enough to attract other businesses • The most important implication of this model is that cities can form anywhere • Business activity, rather than natural resources or location, determines where new cities will form • Core-periphery model: agglomeration of manufacturing will occur at an urban hub, while agricultural producers will continue to exist at the periphery • Consumers choose to locate based on wage rate, land rental rate and availability of goods • The periphery must continue to exist even as the core expands

6. Krugman—1991 • “Circular causation”—once a city is established, the benefits of agglomeration draw in more businesses and consumers • In order to minimize transportation costs, manufacturers cluster together—this becomes more important as production is broken into sub-industries; this is called the “price index effect” • An accumulation of businesses draws in more skilled labor, increasing the quality of labor and expanding the customer base; this is called the “home market effect” • Firms near each other share knowledge and technology • Drawback: prices are inflated • As long as transportation costs are low, the beneficial price index and home market effects outweigh the cost of competition and a city will form somewhere in a rural landscape

7. Krugman—1993 • In a later paper, Krugman re-coins the concept of circular causation into “first nature” and “second nature” • Look at Chicago—there is not a wealth of natural resources available there • Minimization of transportation costs is the “first nature” that determines all possible locations where a city could form • The “second nature” of a city is the accumulation of businesses that attract more business—the city becomes a destination in and of itself

8. Fujita • In a discussion similar to Krugman, he mentions the “snowball effect” of economic activity clustered in an urban center • Some of the benefits of agglomeration include: • Transfer of knowledge • Technology • Low transportation cost • Variety of products • Density of laborers and consumers • Along with nontraded goods—cities attract a variety of businesses such as restaurants, law firms and barbershops that cannot be exported from the city, an additional benefit • Fujita more than others stresses the human benefit of agglomeration: people have a natural propensity to live around and interact with others, creating an intellectual and creative network • “Face-to-face communication is most effective for rapid product development”Information as a public good

9. Hanson • The accumulation of business drives wage rate up, attracting laborers • Market access is a stronger draw than natural resources available in the city

10. Transformation of the Monocentric System • The previous models hypothesized formation of a single city in a rural area • How do you explain locations of cities in three-dimensional space, and why some are closer than others? • Bifurcation is the division of urban activity between more than one geographic area • There are several theories by which bifurcation could occur in a city

11. Fujita Population Size and Capacity Model Specifications • Agglomeration is caused by circular causation (centripetal force, “second nature”, etc.), but frontier cities occasionally emerge at the periphery • There is some critical population Ñ at which competition between neighboring firms is so high that it is beneficial for firms to relocate to the periphery to reduce cost of importing agricultural goods • These periphery firms benefit from proximity to the rural market and low land/wage rates • At some distance x* the benefit of relocation is maximized, such that one can predict the bifurcation of an established center • For any N > Ñ, a city will bifurcate into one urban center with two peripheral cities at distances x* and –x* from the center • Bifurcation continues to occur as cities reach saturation (Fujita 1997, 413)

12. Partridge NEG—An Alternative Model Proximity of Urban Centers • New economic geography model: agglomeration shadows from an urban center limit the amount of economic activity that occurs in the surrounding region • Partridge hypothesizes that the centripetal forces of an urban center outweigh access to rural markets and lower cost at the periphery, pulling business into the city • Thus, it is beneficial for small cities to locate within the shadow of larger ones • Partridge tests a model relating growth rate of city to distance to high-tier urban centers, and finds that growth is higher with proximity to the center (Partridge, 452)

13. Conclusions from Previous Literature • Urban agglomeration acts as a centripetal force, drawing in other business because of: • Variety of other goods available • Variety and availability of nontraded goods • Quality of labor force • Size of consumer base • Knowledge sharing and technology • At a certain point, a city reaches saturation and bifurcates (Fujita) • Small (“low-tier”) urban centers benefit from being located proximally to large cities (Partridge)

14. Dos Perros • Opened August 2009 at Mangum and E Parrish • At the time, this was far removed from other restaurants in the downtown area (Toast, Revolution, American Tobacco complex) • Owner Charlie Deal • Mexican fine dining • Over the past 4 years of operations, how have restaurant openings in the downtown area affected business?

15. Dos Perros Total Sales, 2010-2012

16. What about Bull City Burger? • The proximity of BCBB has actually helped Dos Perros draw more customers to the area west of Mangum St., Charlie tells me • When the wait is long at Dos Perros, customers can opt to eat at BCBB and come back another night • Bars (Alley 26) and bakeries (Loaf, Scratch) are even more complementary—restaurant patrons can have a drink at Alley 26 while they wait for a table • Charlie’s other restaurant, Jujube, is located in a strip mall in Chapel Hill—there is no spillover of consumers like there is in Durham, because if a table is not available guests will have to leave and come back, or just come back another night

17. Dos Perros Saturday Night Average Seatings

18. Dos Perros Holiday Seatings

19. Restaurateurs on Durham • “We’re sort of the envy of Chapel Hill and Raleigh.” – Charlie Deal • Durham has a buzz that attracts customers • Any new opening will draw in customers, even to restaurants that have been open for years • Downtown Durham has become a destination in itself • Matt Kelly, owner of Vin Rouge and Mateo, noticed a similar trend • Having a diverse selection of quality restaurants drives business • Chef’s reputation, location, skill are still important • Durham has been attracting skilled and creative chefs—the success is not simply due to concentration • When Blu opened next door to Vin Rouge, he noticed no lag in business • DPAC creates another reason for Durham residents to come downtown for dinner

20. Conclusions • There are several possible explanations for Durham’s existence and success: • Concentration of business activity has drawn in other restaurants and food shops (evidence: Dos Perros) • The DPAC has created a reason for Durham residents to travel downtown • The proximity of Durham to Raleigh gives Durham residents access to the resources of a larger city with lower land rental cost • Even if there is an absence of natural resources, Durham has created a centripetal force that draws in new business

21. Implications and Further Study • Does the success in Durham necessarily imply that Raleigh has reached saturation? • At what point will Durham reach saturation? • Questions for further study: • What effect did the DPAC have on restaurant openings and business • How did the hub of activity at Geer St. and Rigsbee Ave. originate, and how has business changed over the past 1-2 years • Policy implications: • How will toll roads impact the development of Raleigh and Durham, both individually and as a core-periphery set?

22. References • Fujita, M. and T. Mori, 1997, “Structural Stability and Evolution of Urban System,” Regional Science and Urban Economics, 27, 399-442 • Fujita, M. and J. F. Thisse, 1996, “Economics of Agglomeration,” Journal of the Japanese and International Economies, 10(4): 339-378 • Hanson, Gordon H., 2005, “Market Potential, Increasing Returns, and Geographic Concentration,” Journal of International Economics, 67, 1-24 • Krugman, P., 1991, “Increasing Returns and Economic Geography,” Journal of Political Economy, 99, 483-499 • Krugman, P., 1993, “First Nature, Second Nature, and Metropolitan Location,” Journal of Regional Science, 33, 129-144 • Partridge, M. D., D. S. Rickman, K. Ali and M. R. Olfert, 2009, “Do New Economic Geography Agglomeration Shadows Underlie Current Population Dynamics Across the Urban Hierarchy?” Regional Science, 88, 445-466

23. Questions?