Spatial Competition with Endogenous Location Choices: An Application to Discount Retailing

42 Pages Posted: 16 Jun 2008

See all articles by Ting Zhu

Ting Zhu

University of Chicago

Vishal P. Singh

GSIA, Carnegie Mellon University

Date Written: July 2007

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: discrete games, location choice, retail competition, discount stores

JEL Classification: L13, M3, D43

Suggested Citation

Zhu, Ting and Singh, Vishal P., Spatial Competition with Endogenous Location Choices: An Application to Discount Retailing (July 2007). Available at SSRN: https://ssrn.com/abstract=1003313 or http://dx.doi.org/10.2139/ssrn.1003313

Ting Zhu (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Vishal P. Singh

GSIA, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
265
Abstract Views
1,202
rank
127,764
PlumX Metrics