Measuring Competition in Spatial Retail

Abstract

We propose a framework for analyzing spatial competition between retailers of different formats. Our approach yields localized measures of concentration and store-level diversion ratios that can be used to prospectively evaluate mergers in highly differentiated retail markets. Our method does not require the analyst to define markets ex ante, collect prices or construct ad hoc price indices. Using data from the supermarket industry, we evaluate two representative mergers. Contrary to conventional wisdom, we find substantial cross-format competition between supercenters, club stores, and traditional grocers. Our analysis cautions against ignoring the impact of new formats when evaluating mergers between traditional grocers.