Market and Welfare Effects of Big Box Retail Entry in a Linear City Model with Oligopolistic Competition

Author: Michael Visser, Ph.D., et al.

Publication: Annals of Economics and Statistics

Publication Date: September 2017

Abstract:
We model the entry of a big box retailer into a closed monocentric city with an existing CBD retailer. The big box produces a lower quality good and has an efficiency advantage over the downtown firm. We find that while the big box charges a lower price, it may produce more or less output, and hire more or fewer workers, than the downtown retailer. Its entry may also increase or decrease local retail employment, depending on key parameters. We show that the big box?s profit-maximizing location is closer to the CBD than the utility-maximizing point. The socially optimal location is even farther from the CBD than the utility-maximizing location if the substitutability between goods is low enough and the scale of the big box is large enough. This suggests a welfare rationale for zoning rules that prevent big boxes from moving too close to city centers, but under the opposite parameter conditions the socially optimal location can actually be downtown, in which case incentives may be needed to lure the big box closer to the center.

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