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Estimating a Model of Strategic Store-Network Choice

Competition among multi-store chains is common in retail industries. This paper proposes a method for estimating a model of strategic store-network choices by two chains. In contrast to previous studies, I allow chains to not only choose which markets to enter but also how many stores to open in each of those markets. I use lattice-theoretical results to deal with the huge number of possible network choices. I show that a chain's net trade-off between costs and benefits from clustering their stores in a market can be either positive or negative while still ensuring the existence of an equilibrium. By doing so, the model provides a way to freely estimate this within-market effect from the data. Incorporating revenue data allows us to interpret parameters in monetary units and to decompose the within-market effect into cost savings from clustering stores (economies of density) and lost revenues from competition with one's own stores (own-chain business-stealing effect). I apply the technique to a new data set from the convenience-store industry in Okinawa, Japan. Parameter estimates confirm that own chain business-stealing is an important consideration for a chain. I then use the estimated structural model to perform two counterfactual analyses. First, I consider a hypothetical merger of two chains and find that the merger would decrease the number of stores and total sales, and raise the acquirer's profits, thereby reallocating surplus from consumers to the acquirer. Second, I examine how eliminating the zoning regulation introduced in Japan in 1968, which has been at the forefront of urban policy debates, affects store-network choices.

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File URL: http://www.netinst.org/Nishida_08-27.pdf
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Paper provided by NET Institute in its series Working Papers with number 08-27.

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Length: 70 pages
Date of creation: Oct 2008
Date of revision: Nov 2008
Handle: RePEc:net:wpaper:0827
Contact details of provider: Web page: http://www.NETinst.org/

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  1. repec:cup:cbooks:9780521296762 is not listed on IDEAS
  2. Junichi Suzuki, 2010. "Land Use Regulation as a Barrier to Entry: Evidence from the Texas Lodging Industry," Working Papers tecipa-400, University of Toronto, Department of Economics.
  3. Katja Seim, 2006. "An empirical model of firm entry with endogenous productÔÇÉtype choices," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 619-640, 09.
  4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  5. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
  6. Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
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