Spatial differentiation in the supermarket industry: The role of common information
In this paper, I investigate the geographic location decisions of supermarkets to infer their tradeoffs between locating close to favorable demand conditions and differentiating themselves geographically from rivals. The model is based on a discrete-choice game between two types of supermarkets, and incorporates firm uncertainty arising from firm- and location-level private information as well as researcher uncertainty arising from location-level common information. Thus the model addresses the concern that firms’ actions may be based on factors that are unobservable to the researcher, thus correlated conditional on observables. The estimates reflect a significant level of common information. Importantly, I find that ignoring unobserved location heterogeneity results in biased estimates of both the competitive effects and the effects of location-specific observables on profits. Counterfactual predictions are therefore misleading if unobserved location heterogeneity is unaccounted for.
KeywordsProduct competition Retail competition Location choice Discrete games Common information
JEL ClassificationL10 M21 M30
I thank the Trade Dimensions for providing the data for research purposes. This paper is based on a chapter of my dissertation. I am indebted to Miguel Villas-Boas and Richard Gilbert for early guidance on this project. This paper has greatly benefitted from the comments of two anonymous referees, Daniel Ackerberg, Ying Fan, Jeremy Fox, Kostis Hatzitaskos, Puneet Manchanda, Pinar Karaca-Mandic, Peter Reiss, Peter Rossi, S. Sriram and Ting Zhu. I am grateful Tom Marini for data assistance. The usual disclaimer applies.
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