Spatial price and variety competition in an urban retail market: A nested logit analysis

Abstract

We develop a nested logit model of spatial competition in retail markets. Consumers choose stores on the basis of price, variety and transport cost. Three games are considered: a price game, a variety game and a combined price and variety game. The videocassette rental market in Edmonton, Alberta, is used for illustration. Centrally located stores set lower prices and higher varieties than stores on the market periphery. Prices in the price and price-variety games are nearly identical, despite large differences in varieties. Similarly, equilibrium varieties in the price-variety game are similar to varieties in the variety game.