Measuring Competition in Spatial Retail
Abstract
We propose a framework for analyzing spatial competition between retailers of different formats. Our spatially-aggregated discrete choice model incorporates overlapping consumers’ choice sets and avoids the need for researchers to define markets ex ante. In addition, we leverage the relative uniformity of pricing, assortment, and amenity strategies within retail chains to estimate flexible substitution patterns without accounting for the many thousands of product prices within a store or constructing ad hoc price indices. We apply our model to the grocery retail industry in the United States to illustrate how it identifies the importance of location, format and the spatial distribution of consumers in determining the competitiveness of a market. Contrary to conventional wisdom, we find substantial cross-format competition between supercenters, club stores, and traditional grocers. We use our estimates to evaluate two representative mergers between supermarket chains to show how our estimates can inform antitrust policy.