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Market and Welfare Effects of Big Box Retail Entry in a Linear City Model with Oligopolistic Competition

Author

Listed:
  • Rasha Ahmed

    ()

  • Mark Stater

    ()

  • Michael S. Visser

    ()

Abstract

We model the entry of a big box retailer into a closed monocentric city with an existing CBD retailer. The big box produces a lower quality good and has an efficiency advantage over the downtown firm. We find that while the big box charges a lower price, it may produce more or less output, and hire more or fewer workers, than the downtown retailer. Its entry may also increase or decrease local retail employment, depending on key parameters. We show that the big box?s profit-maximizing location is closer to the CBD than the utility-maximizing point. The socially optimal location is even farther from the CBD than the utility-maximizing location if the substitutability between goods is low enough and the scale of the big box is large enough. This suggests a welfare rationale for zoning rules that prevent big boxes from moving too close to city centers, but under the opposite parameter conditions the socially optimal location can actually be downtown, in which case incentives may be needed to lure the big box closer to the center.

Suggested Citation

  • Rasha Ahmed & Mark Stater & Michael S. Visser, 2017. "Market and Welfare Effects of Big Box Retail Entry in a Linear City Model with Oligopolistic Competition," Annals of Economics and Statistics, GENES, issue 127, pages 123-161.
  • Handle: RePEc:adr:anecst:y:2017:i:127:p:123-161
    DOI: 10.15609/annaeconstat2009.127.0123
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    File URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.127.0123
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    More about this item

    Keywords

    big box retailing; linear city models; subcenters; firm location decisions; duopolistic competition; central business district; theoretical welfare analysis;

    JEL classification:

    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • H8 - Public Economics - - Miscellaneous Issues

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