Loschian Spatial Competition in an Emerging Retail Industry

Article excerpt

Loschian competition is traditionally thought to lead to a spatial equilibrium in which firms enter an industry and disperse across geographic space until each firm earns insufficient excess profit to attract net new entrants. This paper assesses the appropriateness of Loschian analysis using video (movie) rental establishments in Toronto as a case example. The video rental business, as we know it today, began to take shape around 1980 and has since seen much turnover. The paper describes the changing pattern of single-site and chain stores between 1982 and 1999. I use logistic regression to predict the survival of existing establishments. Using survivorship as a proxy for profit, the paper draws conclusions about the extent to which temporal changes in video store location correspond to the tenets of Loschian competition. The coexistence of chain and single-site stores suggests that there are distinct market niches and that single-site stores have used a "swarming" strategy to compete against chains. Conclus ions are drawn about how the retail sector might evolve in the future because of the locational competition between chains and single-site stores.

In an industry characterized by a homogenous product, consumers spread uniformly across space, economies of scale, costless relocation, perfect information, nonzero transportation costs, and a finite range, the standard model of Loschian spatial competition predicts a spatial equilibrium of firms. For simplicity of exposition, suppose that consumers make single-purpose, home-based trips to firms to purchase at f.o.b. prices and that that they do not purchase from firms located outside the region. Imagine initially that there are few incumbents, widely dispersed across the region, with no overlaps in geographic market area (defined by the range of the good) among them. Further, suppose that incumbents are identical; each charges the same f.o.b. price and earns the same positive excess profit. Suppose further that these excess profits attract identical new entrants to the industry within the region. Because excess profit is a Ricardian rent that is site-based, the new firm wants to stay away from its competitor s. However, as the total number of firms in the industry in the region increases, new firms eventually must choose locations that have market areas that overlap those of existent firms hence eroding profits for both. Loschian models vary in their assumptions about how a firm expects competitors to respond to its choice of f.o.b. price. Nonetheless, all Loschian models postulate that, in equilibrium, firms stop entering the industry when excess profits become nearly zero. In a simple version of the Loschian model, excess profit is monotonically related to the number of customers within range and closer to that firm than to any other. If the number of customers is large, the firm can earn at least normal profits. If not, the firm will, in the long run, quit the industry. In Loschian equilibrium, locational competition shrinks the number of customers and the market area for each firm down to the same (normal profit) level. Loschian models also suggest that the f.o.b. price charged by each firm declines as the de nsity of firms (that is, the total number of firms within the geographic region) increases. However, this simple description of Loschian equilibrium ignores at least two essential considerations. (1)

* In reality, consumers typically are not spread evenly across the geographic region. This has implications for Loschian equilibrium. For one, firms need not all have a market area of the same geographic size. More important, firms need not have the same f.o.b. price; firms in sparsely populated areas may have higher f.o.b. prices than firms in populous areas. In the simple model envisaged here, monopoly advantage arises to a firm only because of transportation cost. The more firms cluster together, the less the monopoly advantage. At the same time, clustering increases the firm's sensitivity to price competition. …