The three chapters of this dissertation contribute to the understanding of strategic firm behavior in oligopolistic markets. In particular, I link spatial market features to standard competition analysis, which enables new perspectives to explain market outcomes in geographically defined markets and provide applications to the grocery retail industry. Chapter 1 studies the importance of returns to product differentiation and distribution economies for a firm’s optimal location choice. Inspired by the empirical work of Holmes (2011), I introduce endogenous distribution costs in the model of Hotelling (1929). The proposed model shows an interesting trade-o between demand and cost considerations when a firm plays a hybrid location strategy. Given the location of local distribution centers and agents’ displacement cost parameters, it is shown that, under certain conditions, the optimal locations of the firms are in the interior of the Hotelling line rather than at the edges of the line. The supply-cost effect which drives this result diminishes with the distance of the distribution center from the market so that the scale of the distribution area also becomes determinant for an optimal location strategy. Chapter 2 investigates empirically the effect of anticipated price competition and distribution costs in firms’ location choices within an oligopolistic market. I set up a static location-price game of incomplete information in which retailers choose their locations based on (firm-)location-specific characteristics, the expected market power and the expected degree of price competition. In particular, I tie the firms’ strategic location incentives to the population distribution using the concept of captive consumers. This approach is in line with theoretical spatial price competition models and does not require price or quantity data. I address the computational difficulties of the estimation using mathematical programming with equilibrium constraints. Applied to grocery stores operated by the two main conventional supermarket chains in the US, the model confirms the existence of benefits of spatial differentiation for the firms’ profits and provides evidence that the firms anticipate price competition and distribution costs in their site selections. Chapter 3 studies empirically the volatility of retail price indexes at the store level as a result of changes in the local market structure within an urban market. Using a reduced-form pricing equation, I decompose the potential competition effect in the effect of incumbent retailers and the effect of new grocery store openings. Considering the Spanish supermarket industry, which is strongly regulated, I make use of panel data and use a first-difference approach to estimate a distributed-lag model. The results suggest an instantaneous price reaction to entry which is smaller than the long-term competition effect. Possible explanations are constrained price- exibility for incumbent firms in the short run or difficulties of the entrant in establishing themselves as coequal rivals. I find that this gradual price reaction is especially pronounced for supermarkets positioned in the middle price-segment, and the strongest price reaction has been found for high-price retailers.
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