Endogenous Location Choice Research Articles

Spatial competition with endogenous location choices: An application to discount retailing

Spatial competition with endogenous location choices: An application to discount retailing

Spatial Competition with Endogenous Location Choices: An Application to Discount Retailing

This paper examines the importance of geographical differentiation in store location decisions of firms in the retail discount industry. Using a novel data set that includes the store locations and accompanying market conditions for all stores belonging to the Wal-Mart, Kmart, and Target chains, we study the factors that influence the entry and location decisions of these firms. The model involves an incomplete information game between the three players where each firm has private information about its own profitability. A key feature of our modeling approach is that it permits asymmetries across firms in the impact of exogenous market characteristics and competitive interaction effects. Variations in the exogenous firm specific characteristics, such as the distances from the market to firms' headquarters and the nearest distribution centers, serve as exclusion restrictions and provide the source for model identification. Parameter estimates of the payoff functions are used to predict the equilibrium market structure under a variety of market conditions that provide insights into the competitive landscape of the industry. Results show that all firms exert a strong negative impact on competitors when they are in close proximity, but the effect decreases with distance to rivals suggesting strong returns to spatial differentiation in this industry. Target stores fare well under competition except when these competitors are in close proximity. Wal-Mart's supercenter format is found to be the most formidable player as it substantially impacts competitors even at a large distance. We also find significant asymmetries across players in their response to market conditions and competition interactions.

Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms

This paper explores optimal environmental tax policy under which duopoly firms strategically choose the location of their plants in a simple three-stage game. We examine how the relationship between the optimal emission tax and the choice of location of duopoly firms affects the welfare of the home country. We characterize the relationship between the optimal emission tax and the fixed cost, depending on the degree of environmental damage from production. Finally, we show the existence of asymmetric equilibrium in which either firm chooses relocation of its plant even if the duopoly firms are identical ex ante.

Retail sprawl and multi-store firms: An analysis of location choice by retail chains

A growing number of cities and towns restrict the number of chain stores within their borders in order to prevent sprawl and increase in traffic problems. This paper verifies these concerns by analyzing endogenous location choices by multi-store firms, which sell heterogeneous products and can charge different prices at every store. It takes a generalized transportation cost approach to Salop [Salop, S.C., 1979. Monopolistic competition with outside goods. Bell Journal of Economics 10, 141–156], in which consumers' utility not only depends on real transportation costs but also on their preferences or tastes. The model confirms that firms' location strategies contribute to retail sprawl. However, the resulting locations actually minimize consumers' generalized transportation costs for given sizes of retail chains. One of the implications is that further concentration in the retail industry is welfare improving.

U.S. Exports and Multinational Production

This paper presents a monopolistic competition model of trade and multinational production that incorporates asymmetric trade barriers and international differences in production costs. The model predicts the functional form for the dependence of U.S. exports and multinational production on tariffs, distance, and production costs. To deal with simultaneity, we estimate the nonlinear equations of U.S. exports and multinational production simultaneously. In the estimation, we also include country fixed effects and allow for endogenous location choice by firms. The estimation yields reasonable estimates of the structural parameters, including the elasticity of substitution. Based on the estimates, we then simulate the effects of trade liberalization. We find that the elimination of tariffs worldwide would increase U.S. exports by 3.0% and U.S. multinational production by 21.7%. This large expansion of U.S. overseas production mainly results from an expected increase in the number of U.S. foreign affiliates in response to tariff reductions.

Spatial Pricing Policies Reconsidered: Monopoly Performance and Location

This paper reexamines the welfare implications of three pricing regimes (mill, uniform, and discriminatory) for a monopoly. Assuming linear demand and constant marginal costs, I show that with the introduction of endogenous location choice, uniform delivered pricing may provide the highest social welfare when demands in different markets are sufficiently heterogeneous; whereas discriminatory pricing always dominates uniform pricing when demands in different markets are similar.

Mode, Size, and Location of Foreign Direct Investments and Industry Markups

Several studies find that inward foreign direct investment (FDI) raises host industries' competition and productivity using aggregate FDI measures: the monetary flows or the change in the industries' foreign production share. Yet FDI flows are composed of many individual, heterogeneous investments. Reflecting this heterogeneity, I ask how the average traits of the individual investments that constitute the FDI flow further affect the host. While the results show that inward FDI does heighten competition for US manufacturing industries in 1987-1991, price-cost markups fall even more when foreign investments locate further away from incumbent industry, which is consistent with endogenous location choice.

Mode, size, and location of foreign direct investments and industry markups

Several studies find that inward foreign direct investment (FDI) raises host industries’ competition and productivity using aggregate FDI measures: the monetary flows or the change in the industries’ foreign production share. Yet FDI flows are composed of many individual, heterogeneous investments. Reflecting this heterogeneity, I ask how the average traits of the individual investments that constitute the FDI flow further affect the host. While the results show that inward FDI does heighten competition for US manufacturing industries in 1987–1991, price–cost markups fall even more when foreign investments locate further away from incumbent industry, which is consistent with endogenous location choice.

Strategic provision of local public inputs for oligopolistic firms in the presence of endogenous location choice

We develop a model in which two regional governments compete for a mobile oligopolistic firm by providing local public inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial nonrivalness of the local public inputs) and an agglomeration disadvantage (costs associated with the change of location of firms). We show that a central government of both regions induces an interregionally optimal allocation of firms by providing the optimal levels of local public inputs. The decentralized provision of local public inputs by regional governments, however, leads in most cases to a (interregionally) suboptimal allocation.

Housing demand properties in the monocentric market form

Individual compensated demand functions must satisfy well-known properties: negative own- price effects and symmetric cross-price effects. This paper reexamines these properties for goods like housing, the prices of which vary within spatial market areas, and demonstrates how compensated demand properties must be modified to take into account the effects of endogenous location choice. It also derives Slutsky equations for both location and housing demands and applies these relationships with existing empirical estimates to evaluate the size of the compensated housing demand own-price effect with endogenous location.