Working Paper: NBER ID: w15832
Authors: Paul B. Ellickson; Stephanie Houghton; Christopher Timmins
Abstract: We measure the effects of chain economies, business stealing, and heterogeneous firms' comparative advantages in the discount retail industry. Traditional entry models are ill-suited for this high-dimensional problem of strategic interaction. Building upon recently developed profit inequality techniques, our model admits any number of potential rivals and stores per location, an endogenous distribution network, and unobserved (to the econometrician) location attributes that may cause firms to cluster their stores. In an application, we find that Kmart and Target benefit most from local chain economies; Wal-Mart's advantage is more global. We explore these results with counterfactual simulations highlighting these offsetting effects.
Keywords: No keywords provided
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Kmart and Target benefit significantly from local chain economies (F12) | Kmart and Target's operations are more sensitive to local market conditions (L81) |
| elimination of local chain economies (F69) | Kmart exiting 522 markets (L81) |
| elimination of local chain economies (F69) | Target exiting 35 markets (R33) |
| Walmart requires a larger increase in market population to offset the presence of an additional rival compared to Kmart and Target (L11) | Walmart's competitive dynamics differ from Kmart and Target (L19) |
| Walmart imposes the strongest competitive pressure on its rivals (L81) | Walmart's market dominance (L81) |
| Kmart has a mixed strategy (H44) | Kmart is more susceptible to business stealing effects (L81) |
| Kmart tends to lose more customers to new entrants compared to Walmart and Target (L81) | Kmart's customer retention is weaker than Walmart and Target (L81) |
| Walmart's advantages are more global in nature (F69) | Walmart's logistical efficiencies and buying power (L81) |
| Kmart and Target thrive on local economies of density (R32) | Kmart and Target's profitability is enhanced in local markets (F61) |