QME

, Volume 7, Issue 1, pp 1–35 | Cite as

Spatial competition with endogenous location choices: An application to discount retailing

Article

Abstract

This paper examines the importance of geographical differentiation in store location decisions of firms in the retail discount industry. Using a novel data set that includes the store locations and accompanying market conditions for all stores belonging to the Wal-Mart, Kmart, and Target chains, we study the factors that influence the entry and location decisions of these firms. The model involves an incomplete information game between the three players where each firm has private information about its own profitability. A key feature of our modeling approach is that it permits asymmetries across firms in the impact of exogenous market characteristics and competitive interaction effects. Variations in the exogenous firm specific characteristics, such as the distances from the market to firms’ headquarters and the nearest distribution centers, serve as exclusion restrictions and provide the source for model identification. Parameter estimates of the payoff functions are used to predict the equilibrium market structure under a variety of market conditions that provide insights into the competitive landscape of the industry. Results show that all firms exert a strong negative impact on competitors when they are in close proximity, but the effect decreases with distance to rivals suggesting strong returns to spatial differentiation in this industry. Target stores fare well under competition except when these competitors are in close proximity. Wal-Mart’s supercenter format is found to be the most formidable player as it substantially impacts competitors even at a large distance. We also find significant asymmetries across players in their response to market conditions and competition interactions.

Keywords

Entry Discrete games Location choice Retail competition Discount stores 

JEL Classifications

L1 L2 L81 R3 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.University of Chicago Booth School of BusinessChicagoUSA
  2. 2.Leonard N Stern School of Business, Marketing DepartmentNew York UniversityNew YorkUSA

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