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Entry and Exit in Grocery Retailing: Local Pre-Emption and Social Efficiency

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  • Howard Smith

Abstract

This paper develops an asymmetric price setting oligopoly model of store opening and closure decisions in the UK supermarket industry which is estimated using a survey of consumer choices and a dataset of store characteristics. The model is used to examine the strategic local entry and exit behaviour of the firms and the social efficiency of stores numbers and store characteristics. It is found that firms use store openings to pre-empt rival competition and there is a degree of local clustering. A welfare analysis of store characteristics and store numbers shows that most existing stores and some hypothetical extra stores are welfare enhancing at the margin. Location is not optimal but location inefficiencies are small and firms have incentives to relocate in socially preferred directions. Recent trends in store characteristics - larger stores and more stores openings by large firms - are welfare improving.

Suggested Citation

  • Howard Smith, 2000. "Entry and Exit in Grocery Retailing: Local Pre-Emption and Social Efficiency," Economics Series Working Papers 7, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:7
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper007.pdf
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-130, January.
    3. Avner Shaked & John Sutton, 1990. "Multiproduct Firms and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 45-62, Spring.
    4. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    5. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    6. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    7. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-597, June.
    8. Smith, H., 1999. "Supermarket Choice, Supermarket Pricing and the Merger and Demerger in Market Equilibrium," Economics Series Working Papers 99207, University of Oxford, Department of Economics.
    9. Trajtenberg, Manuel, 1989. "The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 444-479, April.
    10. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    Cited by:

    1. Powell, Philip T. & Laufer, Ron, 2010. "The promises and constraints of consumer-directed healthcare," Business Horizons, Elsevier, vol. 53(2), pages 171-182, March.

    More about this item

    Keywords

    concentration; entry; retailing; differentiated products; multi-product firms; pre-emption; environmental planning;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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