Top

Empirical Economics

Published in:

30-06-2018

An empirical analysis of entry and location decisions by bars and liquor stores

Authors: Yi Deng, Gabriel Picone

Published in: Empirical Economics | Issue 5/2019

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We analyze the entry and location decisions of bars and liquor stores using a spatial game-theoretical framework. We first estimate a one-industry location game where we model bars and liquor stores separately. We then estimate a two-industry location game where we model bars and liquor stores jointly. The model allows for two contradictory effects: a competition effect and a spillover effect. Estimation results reveal a strong negative competition effect for both bars and liquor stores. However, bars appear to benefit from a substantially positive spillover effect. We also find that bars and liquor stores compete with each other. For example, an additional liquor store in a location decreases the probability of a new bar opening in that location and vice versa.

previous article Intelligence and economic sophistication

next article Is innovation a factor in merger decisions? Evidence from a panel of US firms

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

The original Hotelling (1929) finding that firms will choose to minimize product differences in a location game was proven to be incorrect (Tirole 1988).

The early empirical literature on spatial differentiation often finds evidence contradicting the above theoretical prediction. For instance, Pinkse and Slade (1998) present evidence suggesting that gasoline stations have a tendency for clustering, and Stavins (1995) finds evidence of clustering (in product space) for computer models. A few studies also find evidence of clustering by manufacturers (Ellison and Glaeser 1997; Duranton and Overman 2008). Later studies in this area, including Freedman and Kosova (2012), Netz and Taylor (2002) and Seim (2006), find that retailers that sell homogeneous products will spatially differentiate to avoid price competition.

Picone et al. (2009) already showed that bars and restaurants are more likely to agglomerate relative to grocery stores and liquor stores. The advantage of our structural econometric model compared with Picone et al. (2009) is that instead of relying on a geographical index which only presents a descriptive statistics of firms’ clustering behavior as in their study, our model sheds light on the firms’ decision-making process in a more structural, game-theoretical framework.

The above double-exponential functional form has been widely used in the literature to capture two contradictory effects. For instance, when estimating patent citation dynamics over time, statisticians often have to separate a diffusion process, which tends to increase patent citations as the time lag increases, and an obsolescence process, which tends to decrease citations as the time lag increases, and the double-exponential functional form has been found to be very successful in separating these two contradictory effects due to its great flexibility (Caballero and Adam 1993; Jaffe and Manuel 1996; Hall et al. 2005; Deng 2008). As our needs here are very similar, this functional form becomes our natural choice.

Note that \(\log (1-e^{-\theta N_{j}})\approx -e^{-\theta N_{j}}\) since \( e^{-\theta N_{j}}\) is small. Thus, we have \(E\log (1-e^{-\theta N_{j}})\)\( \approx -\,E(e^{-\theta N_{j}})=-e^{-\theta \left( \varXi ^{m}-1\right) p_{j}\left( 1+\frac{\theta }{2}\left( 1-p_{j}\right) \right) }\).

For robustness, we have also experimented with alternative numbers of potential entrants, by 200 and 250%, respectively (see “Appendix B”). Estimation results are similar and confirm our main conclusions. We have also experimented with different starting points, and estimation results are the same.

Aguirregabiria V, Mira P (2007) Sequential estimation of dynamic discrete games. Econometrica 75(1):1–53CrossRef

Aguirregabiria V, Suzuki J (2016) Empirical games of market entry and spatial competition in retail industries. In: Basker E (ed) Handbook on the economics of retail and distribution, Ch. 9, Edward Elgar Publishing, Cheltenham, UK, pp 201–232

Berry S (1994) Estimating discrete-choice models of product differentiation. Rand J Econ 25:242–262CrossRef

Berry S, Levinsohn J, Pakes A (1995) Automobile prices in market equilibrium. Econometrica 63:841–890CrossRef

Britt H, Carlin B, Toomey T, Wagenaar A (2005) Neighborhood level spatial analysis of the relationship between alcohol outlet density and criminal violence. Environ Ecol Stat 12(4):411–426CrossRef

Caballero RJ, Adam BJ (1993) How high are the giants’ shoulders: an empirical assessment of knowledge spillovers and creative destruction in a model of economic growth. NBER Macroecon Ann 8:15–74CrossRef

Campbell CA, Hahn RA, Elder R, Brewer R, Chattopadhyay S, Fielding J, Naimi TS, Toomey T, Briana Lawrence B, Middleton JC, Task Force on Community Preventive Services (2009) The effectiveness of limiting alcohol outlet density as a means of reducing excessive alcohol consumption and alcohol-related harms. Am J Prev Med 37(6):566–569

D’Aspremont C, Gabszewicz JJ, Jacques-Francois T (1979) On Hotelling’s stability in competition. Econometrica 47(5):1145–1150CrossRef

Datta S, Sudhir K (2013) Does reducing spatial differenciation increases product differentiation. Quant Market Econ 11(1):83–116CrossRef

Deng Y (2008) The value of knowledge spillovers in the U.S. semiconductor industry. Int J Ind Organ 26(4):1044–1058CrossRef

Duranton G, Overman HG (2008) Exploring the detailed location patterns Of U.K. manufacturing industries using microgeographic data. J Reg Sci 48(1):213–243CrossRef

Eaton C, Lipsey R (1989) Product differentiation. In: Schmalensee R, Willig R (eds) Handbook of industrial organization, Ch. 12, vol 1. Elsevier, Amsterdam, pp 723–768CrossRef

Ellison G, Glaeser E (1997) Geographic concentration in U.S. manufacturing industries: a dartboard approach. J Polit Econ 105(5):889–927CrossRef

Freedman ML, Kosova R (2012) Agglomeration, product heterogeneity and firm entry. J Econ Geogr 12(2012):601–626CrossRef

Fisher JH, Harrington JE (1996) Product variety and firm agglomeration. Rand J Econ 27(2):281–309CrossRef

Gyimah-Brempong K (2001) Alcohol availability and crime, evidence from Census Tract data. South Econ J 68:2–21CrossRef

Hall BH, Adam BJ, Manuel T (2005) Market Value and Patent Citations. Rand J Econ 36(1):16–38

Hotelling H (1929) Stability in competition. Econ J 39(153):41–57CrossRef

Irmen A, Thisse J-F (1998) Competition in multi-characteristics spaces: Hotelling was almost right. J Econ Theory 78:76–102CrossRef

Igami M, Yang N (2014) Cannibalization and preemptive entry in heterogeneous markets. Working paper, Yale School of Management

Jaffe A, Manuel T (1996) Flows of knowledge from universities and federal labs: modeling the flow of patent citations over time and across institutional and geographic boundaries. Proc Natl Acad Sci 93:12671–12677CrossRef

Jia P (2008) What happens when Wal-Mart comes to town: an empirical analysis of the discount retailing industry. Econometrica 76(6):1263–1316CrossRef

Netz JS, Taylor BA (2000) Maximum or minimum differentiations? location patterns of retail outlets. Rev Econ Stat 84(1):162–175CrossRef

Picone GA, Ridley DB, Zandbergen PA (2009) Distance decreases with differentiation: strategic clustering by retailers. Int J Ind Organ 27:463–473CrossRef

Picone G, MacDougald J, Sloan F, Platt A, Kertez S (2010) The effects of residential proximity to bars on alcohol consumption. Int J Health Care Financ Econ 10:347–367CrossRef

Pinkse J, Slade ME (1998) Contracting in space: an application of spatial statistics to discrete-choice models. J Econom 85(1):125–154CrossRef

Seim K (2006) An empirical model of firm entry with endogenous product-type choices. Rand J Econ 37(3):619–640CrossRef

Seim K, Waldfogel J (2013) Public monopoly and economic efficiency: evidence from the Pennsylvania Liquor Control Board’s entry decisions. Am Econ Rev 103(2):831–62CrossRef

Sweeting A (2009) Timming incentives of commercial radio stations: an empirical analysis using multiple equilibria. Rand J Econ 40(4):710–742CrossRef

Stavins J (1995) Model entry and exit in a differentiated-product industry: the personal computer market. Rev Econ Stat 77(1995):574–581

Treno A, Johnson FW, Remer LG, Gruenewald PJ (2007) The impact of outlet densities on alcohol-related crashes: a spatial panel approach. Accid Anal Prev 39(5):894–901CrossRef

Zhu T, Singh V (2009) Spatial competition with endogenous location choices: an application to discount retailing. Quant Mark Econ 7(1):1–35CrossRef

Yang N (2012) Burger King and McDonald’s: Where’s the Spillover? Int J Econ Bus 19(2):255–281CrossRef

Yang N (2015) March of the chains: Herding in restaurant locations. Working paper, McGill University

Title: An empirical analysis of entry and location decisions by bars and liquor stores
Authors: Yi Deng
Gabriel Picone
Publication date: 30-06-2018
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 5/2019
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-018-1507-7

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Other articles of this Issue 5/2019

Asymmetric arbitrage trading on offshore and onshore renminbi markets

Applying panel vector autoregression to institutions, human capital, and output

Household income requirements and financial conditions

Market integration and the persistence of electricity prices

Backcasting cement production and characterizing cement’s economic cycles for Chile 1991–2015

The US oil supply revolution and the global economy