Spatial Competition in Retail Markets: Movie Theaters.∗

Retail markets are extremely important, but economists have few practical tools for analyzing the way dispersed buyers and sellers affect the properties of markets. In this paper, I develop an econometric model of retail demand, a model in which products are location specific and consumers have preferences over both geographic and other product characteristics. I show how to incorporate data on the geographic and demographic distribution of consumers within a market into the model. Using data from movie theaters, I evaluate the effect of choices about theater characteristics (price and quality) on rivals. I find that the business stealing effects across theaters are small and significantly decrease with distance. Next I use theater cost data to estimate an hedonic theater cost function. I combine the demand and supply models to consider the retailer’s optimal store scale decision. The estimates suggest that the market may substantially underprovide movie screens relative to the socially optimal size of movie theaters because the model estimates imply that theaters are frequently close to being local monopolists.