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

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



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.


Entry Discrete games Location choice Retail competition Discount stores 

JEL Classifications

L1 L2 L81 R3 


  1. Aguirregabiria, V., & Mira, P. (2004). Sequential estimation of dynamic discrete games. Working Paper, Boston University.Google Scholar
  2. Aradillas-Lopez, A. (2005). Semiparametric estimation of a simultaneous game with incomplete information. Working Paper, Berkeley.Google Scholar
  3. Bajari P., Benkard, L., & Levin, J. (2005a). Estimating dynamic models of imperfect competition. Working Paper, Duke.Google Scholar
  4. Bajari, P., Hong, H., Krainer, J., & Nekipelov, D. (2005b). Estimating static models of strategic interactions. Working Paper, University of Michigan.Google Scholar
  5. Bayer, P., & Timmins, C. (2004). On the equilibrium properties of locational sorting models. Working Paper, Yale University.Google Scholar
  6. Berry, S. T. (1992). Estimation of a model of entry in the airline industry. Econometrica, 60(4), 889–917.CrossRefGoogle Scholar
  7. Bresnahan, T. F., & Reiss, P. C. (1987). Do entry conditions vary across markets. Brookings Papers on Economic Activity, 1987(3), 833–881.CrossRefGoogle Scholar
  8. Bresnahan, T. F., & Reiss, P. C. (1990). Entry in monopoly markets. Review of Economic Studies, 57(4), 531–553.CrossRefGoogle Scholar
  9. Bresnahan, T. F., & Reiss, P. C. (1991a). Entry and competition in concentrated markets. Journal of Political Economy, 99(5), 977–1009.CrossRefGoogle Scholar
  10. Bresnahan, T. F., & Reiss, P. C. (1991b). Empirical-models of discrete games. Journal of Econometrics, 48(1–2), 57–81.CrossRefGoogle Scholar
  11. Heckman, J. (1978). Dummy endogenous variables in a simultaneous equation system. Econometrica, Econometric Society, 46(4), 931–959.Google Scholar
  12. Jia, P. (2008). What happens when wal-mart comes to town: An empirical analysis of the discount industry. Econometrica (in press).Google Scholar
  13. Kyle, M. K. (2006). The role of firm characteristics in pharmaceutical product launches. RAND Journal of Economics, 37, 602–618.CrossRefGoogle Scholar
  14. Mazzeo, M. J. (2002a). Product choice and oligopoly market structure. Rand Journal of Economics, 33(2), 221–242.CrossRefGoogle Scholar
  15. Mazzeo, M. J. (2002b). Competitive outcomes in product-differentiated oligopoly. Review of Economics and Statistics, 84(4), 716–728.CrossRefGoogle Scholar
  16. Nishida, M. (2008). Estimating a model of strategic store network choice. Working Paper, University of Chicago.Google Scholar
  17. Orhun, Y. (2005). Spatial differentiation in the supermarket industry. Working Paper, Berkeley.Google Scholar
  18. Pakes, A., Ostrovsky, M., & Berry, S. (2004). Simple estimators for the parameters of discrete dynamic games with entry/exit examples. Working Paper, Harvard University.Google Scholar
  19. Seim, K. (2001). Spatial differentiation and market structure: The video retail industry. Yale University Dissertation.Google Scholar
  20. Seim, K. (2006). An empirical model of firm entry with endogenous product-type choices. Rand Journal of Economics, 37, 619–642.CrossRefGoogle Scholar
  21. Zhu, T., Singh, V., & Manusazk, M. (2008). Market structure and competition in the retail discount industry. Journal of Marketing Research (in press).Google Scholar

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

Personalised recommendations