Organizational Form and Product Market Competition Are Focused Firms Weak Competitors?

We examine product market behavior of retailers to determine if diversified or focused firms behave as weak competitors and are perceived as such. We do so in three distinct ways. We first test pricing predictions of a simple switching cost model of market competition, that weaker firms charge higher prices in equilibrium (and sacrifice market share). Not surprisingly, we find higher average prices in cities with a larger proportion of high debt and low efficiency firms. Surprisingly, the same result holds for cities with a larger proportion of focused firms. Our second test documents that firms with these characteristics are more likely to exit after facing a negative shock to their city, again suggesting that like high debt, low efficiency, and focused firms are weak competitors. Given that certain characteristics are associated with weakness, and these characteristics are observable, stronger competitors should be able to take advantage of firms with such characteristics. We model the optimal location decision of a new entrant into a city with existing incumbent stores. The prediction is the entrant locates closer to a weaker incumbent. We document a new entrant locates closer to high debt as well as focused firms suggesting that at least in the retail industry, focused firms are perceived as weak competitors. JEL Classification: D43, G31, G32