Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa

Spatial competition among multi-store …rms is ubiquitous in a wide range of retail industries. However, little is known about how those …rms optimize their networks of stores after a merger due to the computational burden of solving for an equilibrium in store networks. This paper proposes an empirical framework for estimating a game of network choice by two multi-store …rms, which allows us to examine the impact of a hypothetical merger on store con…gurations, costs, and pro…ts. The model explicitly incorporates a fundamental determinant of location choice for multi-store …rms: the trade-o¤ between the business-stealing e¤ect and the costsaving e¤ect from clustering their own stores. The method integrates the static entry game of complete information with post-entry outcome data while using simulations to correct for the selection of entrants. I use lattice-theoretical results to deal with the huge number of possible network choices. Using unique cross-sectional data on store networks and revenues from the convenience-store industry in the Okinawa Island, Japan, I estimate the …rms’ revenue and cost functions. Parameter estimates suggest a retailer’s trade-o¤ between cost savings and lost revenues from clustering its stores is positive across markets and negative within a market. I …nd an acquirer of a hypothetical horizontal merger of two multi-store …rms would decrease its number of stores in suburbs but increase its number in the city center, a¤ecting consumers in di¤erent locations di¤erently. The trade-o¤ from clustering plays a central role in explaining this result. This paper is a revised version of chapter 2 of my Ph.D. dissertation. I would like to thank my advisors Jeremy Fox, Ali Hortaçsu, Chad Syverson, and Jean-Pierre Dubé for their advice and help throughout the project. I have also bene…ted from discussions with Arie Beresteanu, Dennis Carlton, Timothy Conley, Paul Ellickson, Maris Goldmanis, Joseph Harrington, Jean-François Houde, Panle Jia, Samuel Kortum, Steve Levitt, Ryo Nakajima, Hiroshi Ohashi, Yukako Ono, Yeşim Orhun, Katsumi Shimotsu, Andy Skrzypacz, Marius Schwartz, Zhu Wang, Ting Zhu, and seminar participants at the DOJ, Georgetown, Hitotsubashi, HKUST, Iowa, Johns Hopkins, Kyoto, Nagoya, NUS, Osaka, Oxford, Singapore Management, SUNY Bu¤alo, Tsukuba, Tokyo, UCL, Wisconsin-Madison, Yokohama National, the Chicago microlunch and IO lunch seminars, the 2008 EARIE, the 2008 FESAMES, the 2009 IIOC, and the 2010 NAWMES. I would also like to thank Takashi Shinno from Family Mart Co., Ltd. and Yasushi Kinoshita from Tokyo Business Consulting for sharing with me their insights on the convenience-store industry. I gratefully acknowledge …nancial support from the NET Institute (www.netinst.org), the Kau¤man Foundation, and the Center of East Asian Studies. All remaining errors are my own. yCarey Business School, Johns Hopkins University, 100 International Drive Baltimore, MD 21202, USA e-mail: [email protected].