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Dynamic Spatial Competition Between Multi-Store Firms

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Author Info
Victor Aguirregabiria
Gustavo Vicentini

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Abstract

We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store firms. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We provide an algorithm to compute Markov Perfect Equilibria (MPE) in our model. We conduct several numerical experiments to study how the propensity of multi-store retailers to spatial preemptive behavior depends on the magnitude of entry costs, exit value and transportation costs.

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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-253.

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Date of creation: 29 Aug 2006
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Handle: RePEc:tor:tecipa:tecipa-253

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Related research
Keywords: Spatial competition; Market dynamics; Sunk costs; Spatial preemptive behavior.;

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
R10 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General
R30 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - General

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  1. Thomas J. Holmes, 2006. "The Diffusion of Wal-Mart and Economies of Density," 2006 Meeting Papers 15, Society for Economic Dynamics.
  2. Hay, D A, 1976. "Sequential Entry and Entry-Deterring Strategies in Spatial Competition," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 240-57, July. [Downloadable!] (restricted)
  3. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Blackwell Publishing, vol. 71, pages 581-611, 07. [Downloadable!] (restricted)
  4. Edward C. Prescott & Michael Visscher, 1977. "Sequential Location among Firms with Foresight," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 378-393, Autumn. [Downloadable!] (restricted)
  5. Douglas S. West, 1981. "Testing for Market Preemption Using Sequential Location Data," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 129-143, Spring. [Downloadable!] (restricted)
  6. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer. [Downloadable!] (restricted)
    Other versions:
  7. Eaton, B Curtis & Lipsey, Richard G, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Review of Economic Studies, Blackwell Publishing, vol. 42(1), pages 27-49, January. [Downloadable!] (restricted)
    Other versions:
  8. Thomas J. Holmes, 2008. "The Diffusion of Wal-Mart and Economies of Density," NBER Working Papers 13783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  10. Tabuchi, Takatoshi, 1994. "Two-stage two-dimensional spatial competition between two firms," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 207-227, April. [Downloadable!] (restricted)
  11. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09. [Downloadable!] (restricted)
    Other versions:
  12. Victor Aguirregabiria & Pedro Mira, 2004. "Sequential Estimation of Dynamic Discrete Games," Industrial Organization 0406006, EconWPA. [Downloadable!]
    Other versions:
  13. de Palma, A, et al, 1985. "The Principle of Minimum Differentiation Holds under Sufficient Heterogeneity," Econometrica, Econometric Society, vol. 53(4), pages 767-81, July. [Downloadable!] (restricted)
  14. John Rust, 1997. "Using Randomization to Break the Curse of Dimensionality," Econometrica, Econometric Society, vol. 65(3), pages 487-516, May.
    Other versions:
  15. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
  16. Paul Ellickson & Beresteanu Arie, 2005. "The Dynamics of Retail Oligopolies," 2005 Meeting Papers 829, Society for Economic Dynamics. [Downloadable!]
  17. Bonanno, Giacomo, 1987. "Location Choice, Product Proliferation and Entry Deterrence," Review of Economic Studies, Blackwell Publishing, vol. 54(1), pages 37-45, January. [Downloadable!] (restricted)
  18. Ariel Pakes & Paul McGuire, 1994. "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 555-589, Winter. [Downloadable!] (restricted)
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  19. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
  20. Neven, Damien J., 1987. "Endogenous sequential entry in a spatial model," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 419-434. [Downloadable!] (restricted)
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