Work in progress
Abstract: This paper studies how retailers strategically use product assortment to respond to local market conditions when prices are set at the national level. When firms cannot increase the price of a product that is particularly popular in a local market, they can instead replace the product with a more expensive substitute. The profitability of these assortment substitutions depends on the degree of market competition. This study uses extensive receipt and store-level data and a structural equilibrium model to distinguish the impact of market power on assortment choice from other market forces, such as logistics costs. The findings confirm that firms make use of assortment choices, offering fewer and pricier products in markets with stronger local market power. I show that a uniform assortment would benefit consumers but would reduce firm profits. Counterfactual policy experiments reveal that government intervention can improve total market welfare through subsidies to consumers or retailers in remote areas.
Preemption in Spatial Competition: Evidence from the Retail Pharmacy Market
Abstract: We study the entry decisions of the three retail pharmacy chains in Norway over the period from 2004 to 2012. Following deregulation of entry, the market grew rapidly, doubling the number of pharmacies. We document that repeated entry by an already present incumbent chain occurs with non-trivial frequency and set out to investigate whether preemptive motives play a key role. We propose and estimate a highly flexible spatial demand model with overlapping sets of consumers across space. While the estimates imply substantial demand heterogeneity, we reject the hypothesis that the repeated incumbent entries can be explained by market segmentation by store format differentiation. Instead, we propose that private information about local market conditions may play a role. Indeed, we find that an incumbent chain is significantly more likely to respond to local market heterogeneity than competing chains.
Breaking Barriers: Investigating the Effect of Restrictive Covenants on Entry Deterrence in Retail
With Fedor Iskhakov
Abstract: This study examines the impact of restrictions that retailers place on the commercial properties on the dynamics of the grocery industry in Norway. Using unique data that combines information on restrictions on commercial properties issued by retailers, property characteristics, store-level revenues, store entry dates, and detailed demographic data, we establish and estimate a structural dynamic entry model. By analyzing the prevalence and consequences of these entry barriers, we aim to shed light on their role in shaping market outcomes and local competition intensity.
Quality Distortions in Monopolistic Competition
In this paper, we explore how heterogeneous firms decide on the vertical and horizontal qualities of their products. We show that if the cost of quality is relatively high, more productive firms choose higher vertical quality but lower horizontal quality. We also document the distortions that arise in our framework. Specifically, we find that in the market equilibrium, firms tend to underinvest in horizontal quality but overinvest in vertical quality compared to the first best allocation.
Abstract: Our novel approach to modeling monopolistic competition with heterogeneous firms and consumers involves spatial product differentiation. Space can be interpreted either as a geographical space or as s space of characteristics of a differentiated good. In addition to price setting, each firm also chooses its optimal location in this space. We formulate conditions for positive sorting: more productive firms serve larger market segments and face tougher competition; and for the existence and uniqueness of the equilibrium. To quantify the role of the sorting mechanism, we calibrate the model using cross-sectional data on the haircut market in Bergen, Norway, and perform a counterfactual analysis. We find that inequality in the distribution of the gains among consumers caused by positive market shocks can be substantial: the gains of consumers from more populated locations are 3-4 times higher.