Publication: Essays on strategic location choices and pricing strategies in oligopolistic markets
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2015-06
Defense date
2015-07-10
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Abstract
The three chapters of this dissertation contribute to the understanding of strategic firm behavior in oligopolistic markets. In particular, I link spatial market features
to standard competition analysis, which enables new perspectives to explain market
outcomes in geographically defined markets and provide applications to the grocery
retail industry.
Chapter 1 studies the importance of returns to product differentiation and distribution
economies for a firm’s optimal location choice. Inspired by the empirical work
of Holmes (2011), I introduce endogenous distribution costs in the model of Hotelling
(1929). The proposed model shows an interesting trade-o between demand and cost
considerations when a firm plays a hybrid location strategy. Given the location of
local distribution centers and agents’ displacement cost parameters, it is shown that,
under certain conditions, the optimal locations of the firms are in the interior of the
Hotelling line rather than at the edges of the line. The supply-cost effect which drives
this result diminishes with the distance of the distribution center from the market so
that the scale of the distribution area also becomes determinant for an optimal location
strategy.
Chapter 2 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 grocery stores operated by the two main conventional supermarket chains in
the US, the model confirms the existence of benefits of spatial differentiation for the
firms’ profits and provides evidence that the firms anticipate price competition and
distribution costs in their site selections.
Chapter 3 studies empirically the volatility of retail price indexes at the store level as a result of changes in the local market structure within an urban market. Using
a reduced-form pricing equation, I decompose the potential competition effect in
the effect of incumbent retailers and the effect of new grocery store openings. Considering
the Spanish supermarket industry, which is strongly regulated, I make use of panel data and use a first-difference approach to estimate a distributed-lag model.
The results suggest an instantaneous price reaction to entry which is smaller than the
long-term competition effect. Possible explanations are constrained price- exibility
for incumbent firms in the short run or difficulties of the entrant in establishing themselves
as coequal rivals. I find that this gradual price reaction is especially pronounced
for supermarkets positioned in the middle price-segment, and the strongest price reaction
has been found for high-price retailers.
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Keywords
Compotamiento empresarial, Oligopolio, Beneficios, Precios de mercado, Volatilidad