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Estimating Network Economies in Retail Chains: A Revealed Preference Approach

Paul B. Ellickson, Stephanie Houghton, Christopher Timmins

NBER Working Paper No. 15832
Issued in March 2010
NBER Program(s):Industrial Organization

We measure the effects of chain economies, business stealing, and heterogeneous firms' comparative advantages in the discount retail industry. Traditional entry models are ill-suited for this high-dimensional problem of strategic interaction. Building upon recently developed profit inequality techniques, our model admits any number of potential rivals and stores per location, an endogenous distribution network, and unobserved (to the econometrician) location attributes that may cause firms to cluster their stores. In an application, we find that Kmart and Target benefit most from local chain economies; Wal-Mart's advantage is more global. We explore these results with counterfactual simulations highlighting these offsetting effects.

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Document Object Identifier (DOI): 10.3386/w15832

Published: "Estimating Network Economies in Retail Chains: A Revealed Preference Approach," with Stephanie Houghton and Paul Ellickson. RAND Journal of Economics. Vol.44, No.2 (2013):169-193.

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