Original Article
Measuring competition in spatial retail
Paul B. Ellickson,
Paul L.E. Grieco, Oleksii Khvastunov,
Corresponding Author
Paul B. Ellickson
University of Rochester
paul.ellickson@simon.rochester.edu
Search for more papers by this authorPaul B. Ellickson,
Paul L.E. Grieco, Oleksii Khvastunov,
Corresponding Author
Paul B. Ellickson
University of Rochester
paul.ellickson@simon.rochester.edu
Search for more papers by this authorWe are grateful for insightful comments on earlier drafts from Chris Conlon, Jessie Handbury, Charles Murry, Mark Roberts, Marc Rysman, Steven Salop, and two anonymous referees. We also wish to acknowledge seminar participants at Chicago Booth, the Haas School of Business, the University of Rochester, the University of Hong Kong, Penn State, the 2016 NYU Stern IO day, and the 2016 Southern Economic Association meetings in Washington DC.
Abstract
We propose and estimate a spatially aggregated discrete-choice model with overlapping consumer choice sets and demographic-driven heterogeneity that varies by chain. Our approach avoids the need to define markets ex ante and captures rich substitution patterns, even in the absence of price data. An application to the US grocery industry illustrates the importance of location, format, and the spatial distribution of consumers in shaping the competitive environment. Contrary to conventional wisdom, we find substantial cross-format competition between supercenters, clubs, and traditional grocers. Finally, we evaluate two representative mergers between supermarket chains to demonstrate how our estimates inform antitrust policy.
Supporting Information
| Filename | Description |
|---|---|
| OnlineAppendixC.aux776 B | Data S1 |
| OnlineAppendixC.log21.1 KB | Data S2 |
| OnlineAppendixC.pdf133.1 KB |
Table C.1: Additional Parameter Estimates. Table C.2: Chain Effect Estimates, Intercepts. Table C.3: Chain Effect Estimates, Slopes. Table C.4: Effect of Excluding Club Stores on Evaluating the Whole Foods/Wild Oats Merger. |
| OnlineAppendixC.synctex.gz81.2 KB | Data S3 |
| OnlineAppendixC.tex21 KB | Data S4 |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
References
- Adams, B. and Williams, K.R. “Zone Pricing in Retail Oligopoly.” American Economic Journal: Microeconomics, Vol. 11 (2019), pp. 124–156.
- Allcott, H., Diamond, R., Dube, J.-P., Handbury, J., Rahkovsky, I. and Schnell, M. “ Food Deserts and the Causes of Nutritional Inequality.” NBER Working Paper no. 21126, 2018.
- Arcidiacono, P., Blevins, J., Bayer, P. and Ellickson, P.B. “Estimation of Dynamic Discrete Choice Models in Continuous Time with an Application to Retail Competition.” Review of Economic Studies, Vol. 83 (3) (2016), pp. 889–931.
- Atkin, D., Faber, B. and Gonzalez-Navarro, M. “Retail Globalization and Household Welfare: Evidence from Mexico.” Journal of Political Economy, Vol. 126 (2018), pp. 1–73.
- Baker, J.B. “Market definition: An analytical overview.” Antitrust Law Journal, Vol. 74 (2007), pp. 129–173.
- Basker, E. “The Causes and Consequences of Wal-Mart's Growth.” Journal of Economic Perspectives, Vol. 21 (2007), pp. 177–198.
- Berry, S. “Estimating Discrete-Choice Models of Product Differentiation.” RAND Journal of Economics, Vol. 25 (1994), pp. 242–262.
- Berry, S., Levinsohn, J. and Pakes, A. “Automobile Prices in Market Equilibrium.” Econometrica, Vol. 63 (1995), pp. 841–890.
- Carlton, D.W. “Revising the horizontal merger guidelines.” Journal of Competition Law and Economics, Vol. 6 (2010), pp. 619–652.
- Conlon, C.T. and Mortimer, J.H. “ An experimental approach to merger evaluation.” Working Paper no. w19703, National Bureau of Economic Research, 2013.
- Courtemanche, C. and Carden, A. “Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices.” Southern Economic Journal, Vol. 80 (2014), pp. 565–585.
- Davis, P. “Spatial Competition in Retail Markets: Movie Theaters.” RAND Journal of Economics, Vol. 37 (2006), pp. 964–982.
- Della Vigna, S. and Gentzkow, M. “ Uniform Pricing in US Retail Chains.” UC Berkley, Stanford, and NBER, 2017.
- Dobson, P.W. “Exploiting Buyer Power: Lessons from the British Grocery Trade.” Antitrust Law Journal, Vol. 72 (2005), pp. 529–562.
- Dubois, P. and Jódar-Rosell, S. “ Price and Brand Competition between Differentiated Retailers: A Structural Econometric Model.” Technical Report, Toulouse School of Economics Working Paper No. 10-159, 2010.
- Eizenberg, A., Lach, S. and Yiftach, M. “ Retail Prices in a City.” CEPR Discussion Paper no. DP11590, 2016.
- Ellickson, P.B. “Quality Competition in Retailing: A Structural Analysis.” International Journal of Industrial Organization, Vol. 24 (2006), pp. 521–540.
- Ellickson, P.B. “Does Sutton Apply to Supermarkets?” RAND Journal of Economics, Vol. 38 (2007), pp. 43–59.
- Ellickson, P.B. “The Evolution of the Supermarket Industry: From A&P to Wal-Mart.” In E. Basker, ed., Handbook on the Economics of Retail and Distribution, chapter 15, pp. 682–726. Cheltenham, UK: Edward Elgar, 2016.
- Ellickson, P.B., and Grieco, P.L. “Wal-Mart and the Geography of Grocery Retailing.” Journal of Urban Economics, Vol. 75 (2013), pp. 1–14.
- Ellickson, P.B., and Misra, S. “Supermarket Pricing Strategies.” Marketing Science, Vol. 27 (2008), pp. 811–828.
- Farrell, J. and Shapiro, C. “Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition.” B.E. Journal of Theoretical Economics, Vol. 10 (2010), pp. 1–39.
- Figurelli, L. “ Store Choice in Spatially Differentiated Markets.” Working Paper, Boston College, 2012.
- Gandhi, A., Lu, Z. and Shi, X. “ Estimating Demand for Differentiated Products with Zeros in Market Share Data.” Microsoft Research, SUFE, and UW-Madison, 2017.
- Griffith, R., Leibtag, E., Leicester, A. and Nevo, A. “Consumer Shopping Behavior: How Much Do Consumers Save?” Journal of Economic Perspectives, Vol. 23 (2009), pp. 99–120.
- Handbury, J. “ Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities.” Working Paper, University of Pennsylvania, 2013.
- Handbury, J., and Weinstein, D.E. “Goods Prices and Availability in Cities.” Review of Economic Studies, Vol. 82 (2015), pp. 258–296.
- Hanner, D., Hosken, D., Olson, L.M. and Smith, L.K. “Dynamics in a Mature Industry: Entry, Exit, and Growth of Big-Box Grocery Retailers.” Journal of Economics and Management Strategy, Vol. 24 (2015), pp. 22–46.
- Hausman, J. and Leibtag, E. “Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart.” Journal of Applied Econometrics, Vol. 22 (2007), pp. 1157–1177.
- Hitsch, G.J., Hortaçsu, A. and Lin, X. “Prices and Promotions in U.S. Retail Markets: Evidence from Big Data.” Quantitative Marketing and Economics, (2020).
- Hoch, S.J., Kim, B.D., Montgomery, A.L. and Rossi, P.E. “Determinants of Store-Level Price Elasticity.” Journal of Marketing Research, Vol. 32 (1995), pp. 17–29.
- Holmes, T.J. “Bar Codes Lead to Frequent Deliveries and Superstores.” RAND Journal of Economics, Vol. 32 (2001), pp. 708–725.
- Holmes, T.J. “The Diffusion of Wal-Mart and the Economies of Density.” Econometrica, Vol. 79 (2011), pp. 253–302.
- Hortaçsu, A. and Syverson, C. “The Ongoing Evolution of U.S. Retail: A Format Tug-of-War.” Journal of Economic Perspectives, Vol. 29 (2015), pp. 89–112.
- Hosken, D., Olson, L.M. and Smith, L.K. “ Do Retail Mergers Affect Competition? Evidence from Grocery Retailing.” Working Paper no. 313, Federal Trade Commission, 2012.
- Hosken, D. and Tenn, S. “Horizontal Merger Analysis in Retail Markets.” In E. Basker, ed., Handbook on the Economics of Retail and Distribution. Cheltenham, UK: Edward Elgar, 2016.
- Jaffe, S. and Weyl, E.G. “The first-order approach to merger analysis.” American Economic Journal: Microeconomics, Vol. 5 (2013), pp. 188–218.
- Lagakos, D. “Explaining Cross-Country Productivity Differences in Retail Trade.” Journal of Political Economy, Vol. 124 (2016), pp. 579–620.
- Lambert, T.A. “Four Lessons from the Whole Foods Case.” Regulation, Spring (2008), pp. 22–29.
- Levy, D., Dutta, S., Bergen, M. and Venable, R. “Price Adjustment at Multiproduct Retailers.” Managerial and Decision Economics, Vol. 19 (1998), pp. 81–120.
- Matsa, D.A. “Competition and Product Quality in the Supermarket Industry.” Quarterly Journal of Economics, Vol. 126 (2011), pp. 1539–1591.
- Messinger, P. and Narasimhan, C. “A model of retail formats based on consumers' economizing on shopping time.” Marketing Science, Vol. 16 (1997), pp. 1–23.
- Nevo, A. “Measuring Market Power in the Ready-to-Eat Cereal Industry.” Econometrica, Vol. 69 (2001), pp. 307–342.
- Oi, W. “Productivity in the Distributive Trades: The Shopper and the Economies of Massed Reserves.” In Z. Griliches, eds. Output Measurement in the Service Sectors, Chapter 4, pp. 161–191. Chicago: University of Chicago Press, 1992.
- Pakes, A., Porter, J., Ho, K. and Ishii, J. “Moment inequalities and their application.” Econometrica, Vol. 83 (2015), pp. 315–334.
- Seim, K. and Waldfogel, J. “Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions.” American Economic Review, Vol. 103 (2013), pp. 831–862.
- Smith, H. “Store characteristics in retail oligopoly.” RAND Journal of Economics, Vol. 37 (2006), pp. 416–430.
- Stroebel, J. and Vavra, J. “House Prices, Local Demand, and Retail Prices.” Journal of Political Economy, Vol. 127 (3) (2019), pp. 1391–1436.
- Thomassen, Ø., Smith, H., Seiler, S. and Schiraldi, P. “Multi-category Competition and Market Power: A Model of Supermarket Pricing.” American Economic Review, Vol. 107 (2017), pp. 2308–2351.
- U.S. Department of Justice and Federal Trade Commission. “ Horizontal Merger Guidelines.” Washington, DC: DOJ and FTC, 2010.
- Varner, C. and Cooper, H. “Product Markets in Merger Cases: The Whole Foods Decision.” The Antitrust Source, (2007), pp. 1–10.
- Werden, G.J. “A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products.” Journal of Industrial Economics, Vol. 44 (1996), pp. 409–413.
