Information Technology and Local Product Variety: Substitution, Complementarity and Spillovers

This paper addresses the interaction between information technology (IT) and agglomeration. The literature distinguishes two types of interactions, namely a substitution effect and a complementarity effect. We conceptualise a third effect, namely a ‘spillover’ mechanism, by which IT allows places in close proximity of large cities to ‘borrow size’ and sustain greater product variety. We test these mechanisms using detailed data on restaurant cuisine variety in the Netherlands, and the IT dimension is measured through the use and penetration of online restaurant reviews. We find that IT complements cuisine variety in cities, and induces spillovers to smaller places near larger ones, allowing smaller places to sustain ‘rare’ cuisines that were traditionally only present in larger cities. As such, IT leads to the spread of agglomeration benefits such as local product variety over larger territories.