Working Paper: NBER ID: w18449
Authors: Peter Arcidiacono; Patrick Bayer; Jason R. Blevins; Paul B. Ellickson
Abstract: This paper develops a dynamic model of retail competition and uses it to study the impact of the expansion of a new national competitor on the structure of urban markets. In order to accommodate substantial heterogeneity (both observed and unobserved) across agents and markets, the paper first develops a general framework for estimating and solving dynamic discrete choice models in continuous time that is computationally light and readily applicable to dynamic games. In the proposed framework, players face a standard dynamic discrete choice problem at decision times that occur stochastically. The resulting stochastic-sequential structure naturally admits the use of CCP methods for estimation and makes it possible to compute counterfactual simulations for relatively high-dimensional games. The model and method are applied to the retail grocery industry, into which Wal-Mart began rapidly expanding in the early 1990s, eventually attaining a dominant position. We find that Wal-Mart’s expansion into groceries came mostly at the expense of the large incumbent supermarket chains, rather than the single-store outlets that bore the brunt of its earlier conquest of the broader general merchandise sector. Instead, we find that independent grocers actually thrive when Wal-Mart enters, leading to an overall reduction in market concentration. These competitive effects are strongest in larger markets and those into which Wal-Mart expanded most rapidly, suggesting a diminishing role of scale and a greater emphasis on differentiation in this previously mature industry.
Keywords: Dynamic Discrete Choice Models; Retail Competition; Walmart; Market Structure
JEL Codes: C13; C35; L11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Walmart's entry (L81) | large incumbent supermarket chains exit (L81) |
| Walmart's entry (L81) | independent grocers benefit (L81) |
| Walmart's entry (L81) | overall market concentration reduction (L19) |
| Walmart's entry (L81) | large markets competition intensity increases (L11) |