DP10273 Dynamic Spatial Competition Between Multi-Store Firms

Author(s):	Victor Aguirregabiria, Gustavo Vicentini
Publication Date:	November 2014
Keyword(s):	cannibalization, industry dynamics, spatial competition, spatial preemption, store location, sunk costs
JEL(s):	C73, L13, L81, R10, R30
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10273

We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store retailers. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We develop an algorithm to approximate a Markov Perfect Equilibrium in our model, and propose a procedure for the estimation of the parameters of the model using panel data on number of stores, prices, and quantities at multiple geographic locations within a city. We also present numerical examples to illustrate the model and algorithm.