Price Reactions to Rivals' Local Channel Exits
48 Pages Posted: 8 Nov 2015
Date Written: June 2, 2015
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
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