Abstract
A real-options approach was used, incorporating uncertainty and irreversibility of investments, to study the number of stores entering the Swedish retail food market during the period 1994–2002. It was found that uncertainty affected the entry-decision. Entry was less frequent in highly concentrated local retail food-markets characterized by a high degree of uncertainty, whereas higher profit opportunities seem to have increased the probability of entry.
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Notes
Dixit and Pindyck (1994) provide an excellent introduction to the theory of real options.
For an overview, see Lander and Pinches (1998).
The description of the entry decision process is based on interviews with Fredrik Bergström, president of the Swedish Retail Institute (HUI) and Peder Larsson, chief operating officer of ICA Sweden AB.
There are several possible sources to revenue uncertainty. Along the lines of Bulan et al. (2006), we assume that the main source of uncertainty in the retail food market will be in prices and not in costs (i.e. salaries, rent of equipment etc.). The dataset does not contain any measures of such costs, and in the empirical part of the paper costs are assumed to be captured by our municipality- and store type specific fixed effects.
One could include some form of “salvage value” if the investment fails into the theoretical model. This would not alter any of the testable predictions, however, while making the model more complex. In the empirical part of the paper, a salvage value is included in our measurement of the irreversibility of investment.
Note, however, that the opposite effect may also occur. New entrants may benefit from competitors marketing, i.e., a sort of free-riding.
In the empirical section, the number of retail food stores entering the market is modeled instead of continuous investment levels. This is so because Swedish chain-store operators use different store type concepts when entering new markets, and for each such store type concept, the size of the initial investment is largely fixed. Also, the available data do not contain any measures of investment levels.
Classification according to DELFI.
Note that the name Axfood was not introduced until 2000.
Random effects NB models have also been estimated. The random effects are assumed beta-distributed, giving a closed-form analytic expression for the unconditional density as the basis for maximum-likelihood estimation (Hausman et al. 1984). However, if the individual effects are correlated with the regressors, the random-effects specification of the model will suffer from inconsistency due to omitted variables. The null hypothesis of orthogonality of the random effects and the regressors has been tested using a Hausman test (Greene 1993, p. 479). The test statistic χ 2 = 37.51 (p = 0.038) suggests that the null hypothesis can be rejected. Thus all results presented in the paper here are from the fixed-effects specifications of the model.
The first five autocorrelation coefficients of the residual was 0.019 (0.0043), −0.0013 (0.0024), −0.0038 (0.0019), 0.00028 (0.0023), and −0.00083 (0.0014), with standard errors in parentheses. Since the autocorrelation coefficients are fairly small, autocorrelation seems not to be an important problem.
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Daunfeldt, SO., Orth, M. & Rudholm, N. Opening Local Retail Food Stores: A Real-Options Approach. J Ind Compet Trade 10, 373–387 (2010). https://doi.org/10.1007/s10842-010-0078-x
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DOI: https://doi.org/10.1007/s10842-010-0078-x