Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa

47 Pages Posted: 19 Oct 2008 Last revised: 24 Apr 2012

See all articles by Mitsukuni Nishida

Mitsukuni Nishida

Johns Hopkins University - Carey Business School

Date Written: March 1, 2012

Abstract

Spatial competition among multi-store firms is ubiquitous in a wide range of retail industries. However, little is known about how those firms optimize their networks of stores after a merger due to the computational burden of solving for an equilibrium in store networks. This paper proposes an empirical framework for estimating a game of network choice by two multi-store firms, which allows us to examine the impact of a hypothetical merger on store configurations, costs, and profits. The model explicitly incorporates a fundamental determinant of location choice for multi-store firms: the trade-off between the business-stealing effect and the cost-saving effect from clustering their own stores. The method integrates the static entry game of complete information with post-entry outcome data while using simulations to correct for the selection of entrants. I use lattice-theoretical results to deal with the huge number of possible network choices. Using unique cross-sectional data on store networks and revenues from the convenience-store industry in the Okinawa Island, Japan, I estimate the firms' revenue and cost functions. Parameter estimates suggest a retailer's trade-off between cost savings and lost revenues from clustering its stores is positive across markets and negative within a market. I find an acquirer of a hypothetical horizontal merger of two multi-store firms would decrease its number of stores in suburbs but increase its number in the city center, affecting consumers in different locations differently. The trade-off from clustering plays a central role in explaining this result.

Keywords: entry, merger, retail location, supermodular game, zoning regulation

JEL Classification: L13, L40, L81, R52

Suggested Citation

Nishida, Mitsukuni, Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa (March 1, 2012). NET Institute Working Paper No. 08-27, Available at SSRN: https://ssrn.com/abstract=1286313 or http://dx.doi.org/10.2139/ssrn.1286313

Mitsukuni Nishida (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://https://sites.google.com/site/mitsukuninishida/

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