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Estimation of Dynamic Discrete Choice Models in Continuous Time with an Application to Retail Competition

  • Peter Arcidiacono
  • Patrick Bayer
  • Jason R. Blevins
  • Paul B. Ellickson

This paper develops a dynamic model of retail competition and uses it to study the impact of the expansion of a new national competitor on the structure of urban markets. In order to accommodate substantial heterogeneity (both observed and unobserved) across agents and markets, the paper first develops a general framework for estimating and solving dynamic discrete choice models in continuous time that is computationally light and readily applicable to dynamic games. In the proposed framework, players face a standard dynamic discrete choice problem at decision times that occur stochastically. The resulting stochastic-sequential structure naturally admits the use of CCP methods for estimation and makes it possible to compute counterfactual simulations for relatively high-dimensional games. The model and method are applied to the retail grocery industry, into which Wal-Mart began rapidly expanding in the early 1990s, eventually attaining a dominant position. We find that Wal-Mart’s expansion into groceries came mostly at the expense of the large incumbent supermarket chains, rather than the single-store outlets that bore the brunt of its earlier conquest of the broader general merchandise sector. Instead, we find that independent grocers actually thrive when Wal-Mart enters, leading to an overall reduction in market concentration. These competitive effects are strongest in larger markets and those into which Wal-Mart expanded most rapidly, suggesting a diminishing role of scale and a greater emphasis on differentiation in this previously mature industry.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18449.

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Date of creation: Oct 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18449
Note: IO TWP
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  1. Paul B. Ellickson & Stephanie Houghton & Christopher Timmins, 2010. "Estimating Network Economies in Retail Chains: A Revealed Preference Approach," NBER Working Papers 15832, National Bureau of Economic Research, Inc.
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  12. Peter Arcidiacono & Robert A. Miller, 2011. "Conditional Choice Probability Estimation of Dynamic Discrete Choice Models With Unobserved Heterogeneity," Econometrica, Econometric Society, vol. 79(6), pages 1823-1867, November.
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  16. Victor Aguirregabiria & Pedro Mira, 1999. "Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models," Computing in Economics and Finance 1999 332, Society for Computational Economics.
  17. Arcidiacono, Peter & Sieg, Holger & Sloan, Frank, 2002. "Living Rationally Under the Volcano? An Empirical Analysis of Heavy Drinking and Smoking," Working Papers 02-30, Duke University, Department of Economics.
  18. Thomas J. Holmes, 2011. "The Diffusion of Wal‐Mart and Economies of Density," Econometrica, Econometric Society, vol. 79(1), pages 253-302, 01.
  19. Martin Pesendorfer & Philipp Schmidt-Dengler, 2008. "Asymptotic Least Squares Estimators for Dynamic Games -super-1," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 901-928.
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  22. Panle Jia, 2008. "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," Econometrica, Econometric Society, vol. 76(6), pages 1263-1316, November.
  23. Liran Einav, 2010. "Not All Rivals Look Alike: Estimating An Equilibrium Model Of The Release Date Timing Game," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 369-390, 04.
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