Competition Among Retail Formats

Abstract

In this paper, I study how households allocate their budget for food and related items across different types of retailers. I construct a structural demand model that coherently characterizes both consumer expenditure and expenditure allocation among six retail formats. The model considers how price and assortments influence expen- diture allocations. To illustrate how my demand model can be applied in practice, I consider a situation faced by discount stores, during the Great Recession. In 2008, discount stores experienced a loss in share to other retail formats like warehouse clubs. I use my model to examine two different policies that discount stores could use to compete with other retail formats. First, I consider whether discount stores should compete by lowering prices. Second, I evaluate the effectiveness of introducing a new retail format that has smaller assortments. I find that introducing a small-size format is relatively more effective than competing with lower prices.

Keywords: retail, competition