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Erschienen in: Quantitative Marketing and Economics 2/2011

01.06.2011

Local competition, entry, and agglomeration

verfasst von: Ting Zhu, Vishal Singh, Anthony Dukes

Erschienen in: Quantitative Marketing and Economics | Ausgabe 2/2011

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Abstract

This paper analyzes competition between two spatially differentiated multi-product retailers who encounter entry from a low-cost discounter. We assess how entry affects the pricing of the incumbent stores and the role played by the location of the entrant. Our primary objective is to identify how traditional retailers respond to new forms of low-cost retailing. Results show that post entry, the prices for some products are higher than the pre entry. However, which product prices increase depends on the incumbent’s location. Contrary to conventional wisdom, we find that the store closer to the entrant is better off compared to the incumbent located further away. We empirically demonstrate the main workings of our theory using sales data from several grocery stores that saw entry by discount stores in their trading areas.

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Fußnoten
1
According to industry reports, for example, operating costs at Wal-Mart are about 17% of sales, as compared to 22% at the average grocery store (Coggins and Sanauer 2000).
 
2
We summarize the notation in Table 1.
 
3
It may be possible to consider entry by the discounter at some other location. For example, the discounter could locate in the middle of the line, equally distant between the two retailers. In this case, the symmetric incumbents have sufficient loyalty from convenience buyers to abandon the value buyer segment for product 1. Given our focus here on asymmetric effects on competition between A and B post entry, we relegate to Supplemental Appendix the details of the symmetric case. Finally, for discounter locations off the endpoints, but favoring one of the retailers, we expect our analysis to lead to similar qualitative results.
 
4
Note that retailers are differentiated with respect to two attributes: location and assortment. In that sense product 2 yields the same benefit to a consumer whether from a discounter or from a traditional retailer, all else equal. It is possible, however, to imagine that some consumers place higher value on a product from a local, traditional shop, instead of a discount chain. Incorporating this aspect of retailer differentiation would tend to reinforce our basic result.
 
5
This corresponds to “higher order” and “lower order” goods as modeled in Ingene and Ghosh (1990).
 
6
We do not model income effects and have labeled these consumer groups simply to reflect the common notion that high wage earners face higher shopping costs due to the higher opportunity costs of time.
 
7
We considered an alternative model with two additional retailers offering product 3 before the entry of the discount store. For instance, this can be thought of as two shopping centers are located in different parts of town, where both shopping centers contain a traditional grocery store and a small appliance store. While a full description of equilibrium in this 5 player game is algebraically tedious, the key results of the basic model (without the two additional players) are retained.
 
8
This assumption is made to simplify the presentation. Extending the game with a strategic discounter does not change the basic implications. The details of the extension are available in a Supplemental Appendix.
 
9
We assume that consumers have complete information about prices in order to focus on the implication of entry by the discounter. An interesting avenue for future research would be to understand the implications of entry for consumers choosing a retail establishment under incomplete knowledge of prices (Diamond 1971).
 
10
Equilibria in non-trivial mixed strategies would involve distributions of order statistics since value buyers are choosing the minimum of two probabilistically offered prices. Such an investigation may lead to rich interpretations of sales and promotions (Varian 1980; Narasimhan 1988), but is not our present focus.
 
11
Note that the choice between the two equilibria of Proposition 1 is arbitrary for the comparison in §2.2. All other relevant properties of the equilibria are the same and, most importantly, do not depend on a retailer’s location.
 
12
It can be shown that these consumers shop at only one (1) store in equilibrium. See Lal and Matutes (1989) for a formal proof.
 
13
Store C’s price on product 2 is specified as an exogenous variable for the subsequent analysis, however considering the large basket consumers, store C’s choice is a best response. We thank an anonymous reviewer for pointing this out.
 
14
The basic insights of our model do not rely on the fact that there is no competition for product 3. See the Supplemental Appendix for an extension with competition for product 3.
 
15
It is instructive to relate this argument to the Diamond Paradox (Diamond 1971) in which consumers do not shop in equilibrium due to search costs. In our case, Small Basket convenience shoppers do not shop at a second store because of the additional shopping and transportation costs. (We thank a reviewer for making this connection.)
 
16
The nearby retailer can, however, see increased profits as a result of entry when the rival retailer B is not present before or after entry. See the Supplemental Appendix for details of this case.
 
17
The profit function in (1) is proportional to α.
 
18
Grocery department includes packaged items such as detergents and paper towels.
 
19
For department and store level regressions, the Price Index is created using data from 29 product categories (see Montgomery and Rossi 1999).
 
20
The percentage change numbers in Table 4 for each category are obtained from a regression model similar to the department level analysis, i.e., they represent the net impact of Wal-Mart’s entry after controlling for other variables.
 
21
Again, we suppress the coefficients for the marketing mix variables for brevity. Full model parameters along with additional robustness checks to control for seasonality in some products are available from authors.
 
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Metadaten
Titel
Local competition, entry, and agglomeration
verfasst von
Ting Zhu
Vishal Singh
Anthony Dukes
Publikationsdatum
01.06.2011
Verlag
Springer US
Erschienen in
Quantitative Marketing and Economics / Ausgabe 2/2011
Print ISSN: 1570-7156
Elektronische ISSN: 1573-711X
DOI
https://doi.org/10.1007/s11129-011-9097-0