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Estimating a Model of Strategic Store-Network Choice

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Abstract

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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  • Mitsukuni Nishida, 2008. "Estimating a Model of Strategic Store-Network Choice," Working Papers 08-27, NET Institute, revised Nov 2008.
  • Handle: RePEc:net:wpaper:0827
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    File URL: http://www.netinst.org/Nishida_08-27.pdf
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    References listed on IDEAS

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    1. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
    2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    3. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 397-420, Autumn.
    4. Junichi Suzuki, 2013. "Land Use Regulation As A Barrier To Entry: Evidence From The Texas Lodging Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 495-523, May.
    5. 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, September.
    6. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, May.
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    Cited by:

    1. Sumon Datta & K. Sudhir, 2013. "Does reducing spatial differentiation increase product differentiation? Effects of zoning on retail entry and format variety," Quantitative Marketing and Economics (QME), Springer, vol. 11(1), pages 83-116, March.
    2. Andres Aradillas-Lopez & Adam Rosen, 2013. "Inference in ordered response games with complete information," CeMMAP working papers CWP33/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    3. Sumon Datta & K. Sudhir, 2012. "Does Reducing Spatial Differentiation Increase Product Differentiation? Effects of Zoning on Retail Entry and Format Variety," Cowles Foundation Discussion Papers 1851, Cowles Foundation for Research in Economics, Yale University, revised Sep 2012.
    4. Ricard Gil & Mitsukuni Nishida, 2012. "Does Regulation Drive Competition? Evidence from the Spanish Local TV Industry," Working Papers 12-05, NET Institute.
    5. Salim, Mir M., 2013. "Revealed objective functions of Microfinance Institutions: Evidence from Bangladesh," Journal of Development Economics, Elsevier, vol. 104(C), pages 34-55.

    More about this item

    Keywords

    entry; merger; retail location; supermodular game; zoning regulation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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