Large-Scaled Chain Stores versus Small-Scaled Local Stores of the Local Production for Local Consumption

In some localities, a large-scale chain retailer competes against a small-scale local independent retailer that specializes in, for instance, vegetables, fruits, and owers produced locally for local consumption. The former usually attracts consumers by emphasizing its width and depth of products variety, whereas the latter seeks to overcome its limited products assortment by offering lower prices for them than the chain store. This is possible for the local store partly because of lower labor costs and for various other reasons. This study employs the Hotelling unit interval to examine price competition in a duopoly featuring one large-scale chain retailer and one local retailer. To express differences in their product assortments, we assume that the large-scale retailer denoted by A sells two types of product, G 1 and G 2 , whereas the local retailer denoted by B sells only G 1 . Moreover, we assume that all consumers purchase G 1 at A or B after comparing prices and buy G 2 at A . We examine both Nash and Stackelberg equilibrium to indicate that the local retailer can survive competition with the large-scale chain retailer. We also reveal that a monopolistic market structure, not duopoly, optimize the social welfare if consumers always purchase both G 1 and G 2 .