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The role of captive consumers in retailers' location choices

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  • Erdmann, Anett

Abstract

This paper investigates empirically the effect of anticipated price competition and distribution costs in firms' location choices within an oligopolistic market. I set up a static location-price game of incomplete information in which retailers choose their locations based on (firm-)location-specific characteristics, the expected market power and the expected degree of price competition. In particular, I tie the firms' strategic location incentives to the population distribution using the concept of captive consumers. This approach is in line with theoretical spatial price competition models and does not require price or quantity data. I address the computational difficulties of the estimation using mathematical programming with equilibrium constraints. Applied to the supermarket industry, the model confirms the existence of benefits of spatial differentiation for firms' profits and provides evidence that firms anticipate price competition and distribution costs in their site selections.

Suggested Citation

  • Erdmann, Anett, 2015. "The role of captive consumers in retailers' location choices," UC3M Working papers. Economics we1507, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we1507
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    References listed on IDEAS

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    More about this item

    Keywords

    spatial competition;

    JEL classification:

    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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