Networking Off Madison Avenue

New York County, or Manhattan, accounts for 24% of ad agency receipts in the USA. Years ago the popular image had large agencies on Madison Avenue generating this business. But today there are over 1000 agencies in different clusters spread over different neighborhoods in the southern half of Manhattan. In clustering, advertising is known for the key role that networking plays in the operation of agencies, where interviews suggest that informal networking among close neighbors is critical to many agencies’ success. Networking involves the exchange of ideas; and while there is no market place for these ideas, exchanges may be more deliberate, rather than just Marshall’s (1890) “mysteries” of the “air” type of information spillovers. This paper examines the effect on productivity of having more near advertising agency neighborhoods and hence better opportunities for meetings and exchange within Manhattan. We will show that there is extremely rapid spatial decay in the benefits of having more near neighbors even in the close quarters of southern Manhattan, a finding that is new to the empirical literature and indicates our understanding of scale externalities is still very limited. The finding indicates that having a high density of commercial establishments is important in enhancing local productivity, an issue in Lucas and Rossi-Hansberg (2002), where within business district spatial decay of spillovers plays a key role. We will argue also that in Manhattan advertising agencies trade-off the higher rent costs of being in bigger clusters nearer “centers of action”, against the lower rent costs of operating on the “fringes” away from high concentrations of other agencies. Introducing the idea of trade-offs immediately suggests heterogeneity is involved. We will show that higher quality agencies are the ones willing to pay more rent to locate in greater size clusters, specifically because they benefit more from networking. While all