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Concentration of Competing Retail Stores

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  • Hideo Konishi

    ()
    (Boston College)

Abstract

Geographical concentration of stores that sell similar commodities is pervasive. To analyze this phenomenon, this paper provides a simple two dimensional spatial competition model with consumer taste uncertainty. Given taste uncertainty, concentration of stores attracts more consumers since more variety means that a consumer has a higher chance of finding her favorite commodity (a market size effect). On the other hand, concentration of stores leads to fiercer price competition (a price cutting effect). The trade-off between these two effects is the focus of this paper. We provide a few sufficient conditions for the nonemptiness of equilibrium store location choices in pure strategies. We illustrate, by an example, that the market size effect is much stronger for small scale concentrations, but as the number of stores at the same location becomes larger, the price cutting effect eventually dominates. We also discuss consumers' incentives to visit a concentration of stores instead of using mail orders.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 447.

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Length: 30 pages
Date of creation: 01 Dec 1999
Date of revision:
Publication status: published, Journal of Urban Economics 58, 488-512 (2005)
Handle: RePEc:boc:bocoec:447

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Keywords: consumer search; market size effect; price cutting effect; taste uncertainty;

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Citations

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Cited by:
  1. Berg, Nathan, 2008. "Imitation in location choice," MPRA Paper 26592, University Library of Munich, Germany.
  2. Christou, Charalambos & Vettas, Nikolaos, 2003. "Informative Advertising and Product Differentiation," CEPR Discussion Papers 3953, C.E.P.R. Discussion Papers.
  3. Takahashi, Takaaki, 2013. "Agglomeration in a city with choosy consumers under imperfect information," Journal of Urban Economics, Elsevier, vol. 76(C), pages 28-42.
  4. Michael J. Hicks, 2005. "Does Wal-Mart Cause an Increase in Anti-Poverty Program Expenditures?," Public Economics 0511015, EconWPA.
  5. Maria Arbatskaya & Hideo Konishi, 2010. "Referrals in Search Markets," Emory Economics 1004, Department of Economics, Emory University (Atlanta).
  6. Non, Marielle, 2010. "Isolation or joining a mall? On the location choice of competing shops," MPRA Paper 20044, University Library of Munich, Germany.
  7. Tomoya Mori, 2006. "Monocentric Versus Polycentric Models in Urban Economics," KIER Working Papers 611, Kyoto University, Institute of Economic Research.
  8. Larralde, Hernn & Stehl, Juliette & Jensen, Pablo, 2009. "Analytical solution of a multi-dimensional Hotelling model with quadratic transportation costs," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 343-349, May.
  9. Zhang, Xu & Goddard, Ellen W., 2010. "Analysis of Value-Added Meat Product Choice Behaviour by Canadian Households," Project Report Series 99703, University of Alberta, Department of Resource Economics and Environmental Sociology.
  10. Konishi, Hideo & Sandfort, Michael T., 2002. "Expanding demand through price advertisement," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 965-994, September.
  11. Picone, Gabriel A. & Ridley, David B. & Zandbergen, Paul A., 2009. "Distance decreases with differentiation: Strategic agglomeration by retailers," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 463-473, May.
  12. Michael Hicks, 2007. "Wal-Mart’s Impact on Local Revenue and Expenditure Instruments in Ohio, 1988–2003," Atlantic Economic Journal, International Atlantic Economic Society, vol. 35(1), pages 77-95, March.
  13. Ding, Ke & Gokan, Toshitaka & Zhu, Xiwei, 2013. "Search, matching, and self-organization of a marketplace," IDE Discussion Papers 396, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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