Price Reactions to Rivals' Local Channel Exits

47 Pages Posted: 20 Feb 2015 Last revised: 13 Jun 2015

See all articles by O. Cem Ozturk

O. Cem Ozturk

Georgia Institute of Technology - Scheller College of Business

Sriram Venkataraman

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Pradeep K. Chintagunta

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2015

Abstract

In this paper, we study the effect of a firm's local channel exits on prices charged by incumbents remaining in the marketplace. Exits could result in higher prices due to tempered competition or lower prices due to reduced co-location or agglomeration benefits. The net effect of these two countervailing forces remains unknown. In addition, little is known about how this effect could change depending on incumbents' geographic locations. We address this research gap by examining new car price reactions by incumbent multi-product automobile dealerships who experience the exit of a Chrysler dealership in their local markets. We find evidence that the competition effect exceeds the co-location effect: prices increase by about 1% ($318) following an exit relative to the price change in the absence of an exit. Importantly, we find that the price increase is lower at dealerships more proximate to the exiting dealership than dealerships farther away for the same set of cars available across these locations. This finding suggests differences in the extent of the two forces (competition and agglomeration) at different distances from the closed dealership. We assess the generalizability of our results by looking at the impact of GM's closure of Pontiac dealerships. Taken together, our results inform consumers, firms, and policymakers about possible implications of an exit.

Keywords: Competitive Reaction, Market Exit, Pricing, Agglomeration, Automobiles, Bailout

JEL Classification: L11, L62, M30

Suggested Citation

Ozturk, O. Cem and Venkataraman, Sriram and Chintagunta, Pradeep K., Price Reactions to Rivals' Local Channel Exits (June 8, 2015). Available at SSRN: https://ssrn.com/abstract=2566834 or http://dx.doi.org/10.2139/ssrn.2566834

O. Cem Ozturk (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Sriram Venkataraman

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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