Spatial Competition and Preemptive Entry in the Discount Retail Industry

Abstract

Big box retail stores have a large impact on local economies and receive large subsidies from local governments. Hence, it is important to understand how discount retail chains choose store locations. In this paper, I study the store location decisions of those firms, examine the role of preemptive incentives, and evaluate the impact of government subsidies on those decisions. I model firms' store location decisions using a dynamic entry game. It extends the empirical models of dynamic oligopoly entry by allowing for spatially interdependent entry and introducing ma-chine learning tools to infer market divisions from data. The results suggest that preemptive incentives are important in chain stores' location decisions and that they lead to loss of production efficiency. On average, the loss of producer surplus due to preemption is about one million dollars per store.

Keywords: Dynamic games, Entry, Clustering, Preemption, Chain store

JEL Classification: L13, C81, L81