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Concentration of Competing Retail Stores

  • Hideo Konishi

    ()

    (Boston College)

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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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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