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The online version of this article (doi:10.1007/s11129-011-9097-0) contains supplementary material, which is available to authorized users.
The authors are grateful to Thomas Gehrig, Sridhar Moorthy, Nikolaos Vettas, Bo Zhou and several participants at the workshop on Competition Strategies and Customer Relations, Swedish School of Economics and Business Administration, Helsinki, Finland. The authors are listed in reverse alphabetical order and contributed equally.
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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