Publication: The role of captive consumers in retailers' location choices
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2015-05-31
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Abstract
This paper investigates empirically the effect of anticipated price competition and distribution costs in firms' location choices within an oligopolistic market. I set up a static location-price game of incomplete information in which retailers choose their locations based on (firm-)location-specific characteristics, the expected market power and the expected degree of price competition. In particular, I tie the firms' strategic location incentives to the population distribution using the concept of captive consumers. This approach is in line with theoretical spatial price competition models and does not require price or quantity data. I address the computational difficulties of the estimation using mathematical programming with equilibrium constraints. Applied to the supermarket industry, the model confirms the existence of benefits of spatial differentiation for firms' profits and provides evidence that firms anticipate price competition and distribution costs in their site selections.
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spatial competition, location choice, price competition, retail competition, discrete games, constrained optimization