Academic journal article Economic Inquiry

Spatial Competition and Strategic Firm Relocation

Academic journal article Economic Inquiry

Spatial Competition and Strategic Firm Relocation

Article excerpt

I. INTRODUCTION

Spatial competition between firms, and their resulting pricing and location decisions have been important topics of study since Hotelling's (1929) seminal work. According to this work, firms strategically choose their location in an effort to maximize profits. (1) Although space and location have been fruitful areas of research since Hotelling's work, it has not been until relatively recently that econometric techniques and data have been available for measuring these relationships. This study adds to the literature by empirically connecting spatial competition and location. Using a theoretical model of spatial pricing, data on the pricing decisions of firms in the four major sports leagues in North America are used to estimate the impact of space on pricing. These data also allow for the analysis of strategic relocation in the presence of spatial competition, as there were a total of ten team relocations from the period 1995-2005.

The majority of the work on spatial competition has been theoretical in nature, examining the importance of different assumptions on equilibrium price, location, and market areas (e.g., Anderson and Neven 1991; Chamberlin 1953; D'Aspremont, Gabszewicz, and Thisse 1979; Dixit and Stiglitz 1977; Gabszewicz and Thisse 1979; Lerner and Singer 1937; Losch 1954; Osborne and Pitchik 1987; Salop 1979; Spence 1976). A related strain of literature focuses on the firm's location/relocation decisions when facing heterogeneous regulatory rules across locations (e.g., Becker and Henderson 2000; Levinson 1996; Stafford 2000), and while these studies all deal with location/relocation decisions based on the regulatory rules present at different locations, they establish, along with the aforementioned spatial competition literature, the desire of firms to locate/relocate to regions which offer the firm the highest level of attainable profit. Directly linking these two literatures, it follows that firms spatially compete, and that, in the long-run, should there be a more competitively "friendly" market available to the firm, they will relocate to that market.

The lack of empirical studies estimating these relationships is largely due to data and econometric limitations. The first of these, the lack of spatial data, has been all but removed with the growth of Geographic Information System (GIS), which allows spatial relationships to be explicitly modeled. Likewise, the econometric limitations have also been addressed, primarily with the contributions of Ord (1975) and Anselin (1988). Combined, these developments have allowed for the empirical examination of spatial competition in many industries, including examinations of the pricing of: hamburgers by Kalnins (2003), gasoline by Pinske, Slade, and Brett (2002), and college tuition by McMillen, Singell, and Waddell (2007).

This study follows these previous studies by examining spatial pricing data from the four sports leagues in North America (Major League Baseball [MLB], the National Basketball Association [NBA], the National Football League [NFL], and the National Hockey League [NHL]) over the period 1995-2005. Specifically, structural breakpoints are examined at the team level following Fort and Lee (2007), Lee and Fort (2005), and Fort and Lee (2006), with these breakpoints then incorporated into a spatial autoregressive model. The results of this analysis indicate that professional sports franchises do spatially compete within all four leagues, and that there is a positive relationship between ticket prices and the spatially weighted average ticket prices of neighboring teams (i.e., the estimated spatial lag term is positive). These estimates are then used to explore the predicted impact on ticket prices of moving a franchise from one city to another by exploiting the differences in the spatial environment present in the origin and destination markets. This analysis of strategic relocation indicates that nine of the ten franchise moves from 1995 to 2005 were to areas offering more competitively friendly attributes, enabling the team to increase its ticket prices. …

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