What

is a cluster? Why do firms in a particular industry obtain economic benefits

from being located close to one another?

With the term industrial cluster, we indicate a group of companies and firms localised in the same
geographical area. These companies usually work in the same industry sector and form strong
business relationships with each other. An industrial district is similar to an industrial cluster but
they are made up of small and medium size enterprises (SMEs). Some examples of well-known
industrial clusters are Hollywood and Silicon Valley.
in order for the cluster to be able to develop. The second condition is domestic demand: there needs
to be a demand for a certain product for it to be sold in a certain area. The third condition is related
and service industries: the presence or absence of pre-existing related industries in the area has a big
impact on the initial success of the new cluster. The final condition relates to the strategies and
structures present in competition in and outside the country. (Yurii B. Mindlin, Boris M. Zhukov,
Victoria V. Prokhorova, Fedor V. Shutilov, Elena O. Belova, 2016)

Because of the variety of different contexts clusters can be born in, they don’t have one single
model and don’t all have the same origin. Some of them develop around the existence of one large
firm or around networks between similar SMEs. Other clusters form around one or more
universities. This is because universities allow a large amount of new graduates in a similar sector
to be concentrated in the same area, which increases the likelihood of small businesses and startups
to be born.

The main reason why firms and companies decide to network and collaborate inside a cluster is
because of external economies of scale. External economies of scale are factors external to a
company that, despite being external, enhance the business in some way. All of the businesses
inside a cluster benefit from these external economies of scale.

The father of cluster theory is Alfred Marshall, who wrote the principles of economics in 1890. In
this book he discusses some of the advantages of clusters.
One of these advantages is the concept of knowledge spillovers, which refers to the transfer of skills
and knowledge caused by having many different firms working in the same sector being in the same
geographical area. (Vorley T., 2008) Marshall writes, talking about knowledge spillovers, “the
mysteries of trade become no mysteries, but are as it were in the air”. (Marshall, A., 1890)
Part of the reason why knowledge spillovers are common in clusters is due to the phenomenon of
labour market pooling: because of how big and concentrated the market is in these areas it’s
easier for workers to find new jobs in the same area. This causes skilled employees to bring their
knowledge with them when they move to another company.

Another advantage of cluster economies listed by Marshall is the possibility for them to have a
specialised supplier that can provide for all of them. This allows companies to be able to access
more specific materials for a lower cost thanks to the lower transportation costs.

The benefits listed by Marshall are just part of the benefits businesses get through being part of a
cluster. Some other benefits include: the possibility of sharing infrastructures amongst companies,
the ability to offer specialised education and training in the sector of interest. This is especially the
case in clusters formed around universities. Companies also get lower research and transportation
costs and can make use of a social capital formed by the local relationships.

Some of the main examples of cluster economies are mainly found in countries such as the United
States, with clusters such as Detroit and Silicone Valley, and Great Britain, where we have areas
like Thames Valley and London Docklands. Despite this there are still many examples of cluster
economies from around the world. In countries such as India industrial districts populated by
many active SMEs have a huge influence on the economy. This is due to the effect that these SMEs
have both on local and international markets and the employment in the country. (Jankowiak
A.H., 2013)

In conclusion, clusters are a form of economy where firms in the same sector are geographically
present in the same area. Because of how close they are to each other they benefit from the ability
to share resources, knowledge and expenses with the other businesses in the area, creating strong
relationships with them.

References

Jankowiak A.H. (2013), PRACE NAUKOWE UNIWERSYTETU EKONOMICZNEGO WE
WROCŁAWIU RESEARCH PAPERS OF WROCŁAW UNIVERSITY OF ECONOMICS , 1899-
3192

Marshall, A (1890) Principles of Economics, London and New York: Macmillan.

Vorley T., 2008, Geography Compass, volume 2 issue 3, p. 790-813

Yurii B. Mindlin, Boris M. Zhukov, Victoria V. Prokhorova, Fedor V. Shutilov, Elena O. Belova,
2016, International Journal of Economics and Financial Issues,, 6(S1) 261-265.
Using examples, explain what is meant by the term cognitive bias. How might firms
try to exploit these cognitive biases when offering products or services to consumers?

The term cognitive bias indicates a series of subconscious shortcuts that we make use of during the
thinking process.
These shortcuts are mostly used to speed up the thinking process and make use of our instincts and
of our tendency to recognise patterns to find immediate solutions when presented with a large
amount of information to be processed all at once.
There’s four main reasons as of why we make use of cognitive biases.

The first reason as of why we developed cognitive biases has to do with the limits of our memory.
Because there is a large amount of information to remember our brains will prioritise certain pieces
of information instead of others.
Evidence shows that we usually have a tendency to remember in more detail events that have strong
emotions attached to them. This is due to chemical processes going on in our brains when we
experience these emotions which enhance our ability to remember. (Kensinger E. A., 2009) Our
brains also usually remember generalities and key elements rather than details and specifics.

The second reason why we use cognitive biases is due to the need to simplify the information.
When presented with a large quantity of information our brains will remember what stands out to
us the most, this usually being whatever we find funny or bizarre. This is the case with the
bizarreness effect. The bizarreness effect can be explained as “the finding that people have
superior memory for bizarre sentences relative to common ones” (Geraci, L., McDaniel, M.A.,
Miller, T.M; 2013) Our brains also have a tendency to pay more attention to changes in situations
and to facts that confirm our pre-existing beliefs.

The third reason why we make use of cognitive biases is in order to make quick decisions. When
presented with the need to act fast we tend to be influenced by our social setting and end up
following whatever decision the group makes. This is done in order to avoid mistakes and/or
accountability. Other ways we get influenced in quick decisions is by preferring to complete things
we invested time in and making choices that make us feel important and make us feel as If we’re
making an impact.

One last reason why we resort to cognitive bias is to make meaning when we lack data. In order to
make a choice, even a quick one, we need to have enough data to decide what we want to do.
When we lack information our brains tend to “fill in the gaps” by using pattern recognition. The
way our brain uses pattern recognition can often be flawed as we make use of previous
experiences to find patterns, while the conclusions we come up with may not correspond to what
the reality is. A well-known example of this confirmation bias is the Halo effect.

The Halo effect is the tendency to make an overall judgment of a person or a thing based on one
single trait. The Halo effect is commonly linked to the perception that attractive people must be
good. This effect is extensively used in marketing by companies in order to sell a product or a
service. In particular brands use it to build a positive reputation

An example of a company using the halo effect in order to create a strong community around
their products. A study conducted on the Apple Halo effect in India shows how, thanks to the good
reputation Apple has built over the years, many people are loyal to the brand, to the point where
they buy the new products regardless of any actual technological advancements that might have
been made. (Dr. Gunjan Anand, Dr. Amit Kumar, Dr. Tarika Nandedkar, 2020)

This is not the only case of companies making use of cognitive biases to sell products. Firms have
been exploiting buyers’ psychology for a long time in order to advertise products to them in ways
that are not always ethical. Brands often target their ads and marketing strategies to people who
are more susceptible to them, such as younger and older people and people suffering from mental
problems such as eating disorders and addictions.

An example of such marketing practices is the use of natural labels in the selling of cigarettes. A
study by Cassandra Denise Brown and Scot Burton analyses this issue, showing how natural label
claims have an impact on consumers, to the point where they seem to weaken the impact of
graphic health warnings. Graphic health warnings are warnings displayed on packs of cigarettes
containing a strong message regarding the risks of smoking and often containing pictures
displaying said risks. Thanks to graphic health warnings there has been a decrease in cigarette
consumption, which has resulted in a loss of profit for cigarette producers. Natural labels claiming
that the products are “natural” and therefore are not as bad as other cigarettes is just one of the
ways through which these companies have tried to mitigate the action of graphic health warnings.
(Cassandra Denise Davis, Scot Burton, 2019)

Body dysmorphia and eating disorders are also often exploited. An example of exploitation of
body dysmorphia used for profit is the representation in media and, more specifically, in
advertisement of the “ideal male body”. Research shows that “exposure to muscular male figures
in advertisements produces measurable body dissatisfaction in men, as reflected in an increased
difference between the level of muscularity that they perceive themselves to have and the level
they would ideally like.” (Richard A. Leit, James J. Gray, Harrison G. Pope, Jr., 2001)
Some research has been conducted specifically on gay men and their consumption behaviour in
relation to appearance enhancement products. Research shows that many gay men are more
likely to be dissatisfied with their body image, therefore making them more likely to invest in
grooming products and other types of image enhancing products, such as clothing.
(Strubel J., Petrie T.A., 2018)

In conclusion cognitive biases are shortcuts used by our brains in order speed up the thinking
process. Cognitive biases can often lead to flawed thinking that companies can take advantage of
in order to sell products. This way of advertising products can create moral dilemmas as some
advertisements can exploit more sensitive subjects such as ones affected by addictions and body
image issues.

References

Cassandra Denise Davis, Scot Burton, (2019) Making bad look good: The counterpersuasive effects
of natural labels on (dangerous) vice goods, Journal of Business Research, Volume 104, Pages 271-
282, ISSN 0148-2963,

Geraci, L., McDaniel, M.A., Miller, T.M. et al. (2013) The bizarreness effect: evidence for the critical
influence of retrieval process
es. Mem Cogn 41, 1228–1237

Dr. Gunjan Anand, Dr. Amit Kumar, Dr. Tarika Nandedkar (2020) ‘HALO EFFECT’ TO CREATE BRAND
COMMUNITY A CASE OF ‘APPLE’ IN INDIAN ELECTRONIC MARKET, Journal of critical reviews, 7(19):
8535-8545

Kensinger E. A. (2009). Remembering the Details: Effects of Emotion. Emotion review: journal of
the International Society for Research on Emotion, 1(2), 99–113.

Richard A. Leit, James J. Gray, Harrison G. Pope, Jr., (2001), The Media’s Representation of the
Ideal Male Body: A Cause for Muscle Dysmorphia?, Wiley periodicals, 31: 334-338

Strubel, J. and Petrie, T.A. (2018), "Perfect bodies: The relation of gay men’s body image to their
appearance enhancement product consumption behaviors" Journal of Fashion Marketing and
Management, Vol. 22 No. 1, pp. 114 128.