We analyze two major sequential strategic issues that arise when there are openings of new multiline (“anchor”) department stores. First, we provide evidence on the trade-off between localization economies (benefits from additional customers generated by a shopping center or a cluster of independent stores) and the competition inherent in a cluster where many stores are selling close substitutes. Second, we examine the differences between cooperation among stores in a shopping center, where profits of the center as a whole must be maximized, and non-cooperative (freestanding) locations. In both cases, opening decisions are conditioned by the mix of existing retail at the time of an irrevocable commitment of resources to a new store.
We address these issues with a database consisting of all existing multiline department stores (49 chains with 1,515 anchor stores, 545 of which are free standing) in 23 MSAs in the East and Central regions of the US. We have size, type (low, mid and high price), chain affiliation and location for each store. We analyze anchor openings with a linear probability model (LPM) using tract (and, alternatively, shopping center) fixed effects. We find strong negative competitive effects among same price type and size anchors and small localization effects among different price types and sizes. We find even stronger negative competitive effects within shopping centers – i.e., where existing stores must find the opening profit maximizing. Point estimates of localization effects within shopping centers are positive but statistically insignificant. In non-cooperative moves, freestanding anchors and new shopping centers have much smaller competitive effects than within a shopping center. Cross-effects (Localization) are positive but small. The results are robust when we replace tracts with rings of various sizes and interact with demand variables and locational characteristics.
Our results suggest that the mix of different types of anchors is near equilibrium regardless of the choice between large and small footprints, or of the choice whether to locate inside a shopping center. One of our contributions is to show that this is true despite the presence of anchors in various rings outside the shopping center. Similar results hold for free standing stores where openings are not influenced much by different types of anchors nearby or in more distant rings. These findings substantially narrow the geographic range of any localization economies.
Our results add to the mathematical programming literature, where empirical work has not been able to distinguish negative competitive effects from positive localization economies. We establish empirical regularities that industry decision makers might use to explain the opening activity of competitive and complementary anchors. Expectations must be validated by experience if game theory equilibria are to exist (Fershtman and Pakes, 2012).
Further results indicate that each anchor chain is able to choose a different strategy with respect to competition and localization effects. For example, Wal-Mart typically chooses a free standing format at locations with less competition, and with more existing mid-priced anchors, when compared to Target or other free standing anchors.
Joint work with Stephen L. Ross and Tingyu Zhou (University of Connecticut)
