Product Variety and Competition in the Retail Market for Eyeglasses

I analyze an original dataset on the display inventories of several hundred eyewear retailers to study how firms’ product-range choices depend on separation from rivals in geographically-differentiated markets. A two-stage estimation approach is used, employing Seim’s (2002) structural entry model for firms’ first-stage location choices, followed by reduced-form store-level variety regressions. Following Mazzeo (2000) estimates from the first stage are used in the second stage to correct for the endogeneity of rivals’ locations. Results from the first-stage entry model suggest that sellers’ postentry profits decline in the number of nearby competitors, although the first such rivals exert a significantly less negative effect. The secondstage results show that sellers’ product ranges also are non-linear functions of the number of nearby rivals. When a seller is relatively isolated in the product space its equilibrium product variety is increasing in nearby competition. But for more than a few nearby rivals variety starts to decline with extra competitors, consistent with the eventual dominance of business-stealing among proximate sellers. ∗For comments and guidance at various stages of this project I am grateful to Professors Michael Mazzeo, Robert Porter, and Asher Wolinsky. I also had helpful conversations with David Barth, Avi Goldfarb, Ithai Lurie and Robert Vigfusson, and seminar participants at Northwestern. Partial financial support is gratefully acknowledged from a Northwestern University Graduate School Graduate Research Grant, and from the University’s Centre for the Study of Industrial Organization. All errors herein are my responsibility.