Creative Destruction Among Grocery Stores

Technological innovations in inventory, logistics, and sales give grocery chain stores a profitability advantage over old-fashioned local stores. With chain stores advancing, local store incumbents gradually exit. Two questions concerning this creative destruction process are central to competition policy. How do chain stores make entry decisions? How does a chain store’s entry impact incumbent stores’ profitability and survival? In this paper, I develop a tractable dynamic oligopoly model to examine these two questions. The model’s all Markov-perfect equilibria that survive natural refinements can be quickly computed by finding the fixed points of a sequence of low-dimensional contraction mappings. I estimate this model using observations of grocery stores’ entry and exit in small Dutch municipalities. The average sunk cost of entry can be multiple times a store’s expected discounted profit, possibly because Dutch zoning regulation greatly limits potential entrants’ locations. The high average sunk cost considerably delays chain stores’ expansion. An entering chain store reduces local incumbents’ net present values by 29% to 66%. A policy experiment with the estimated model shows that cutting average sunk costs by 40% doubles chain store entry. ∗Tilburg University, Department of Econometrics and OR. E-mail: [email protected] JEL Code: L13, L83