The role of geographic market definition in analysis of grocery retailing

Yanghao Wang, Metin Çakır, Timothy A. Park

Research output: Contribution to journalArticlepeer-review

Abstract

We examine how estimates of household food demand elasticities and store profit margins vary with alternative geographic market extents using structural models of household store choice and retailer competition. Our consumer store choice model is novel, simultaneously accounting for the heterogeneity of store choice sets, households' travel distance to stores, and their store-specific shopping basket prices. We estimate the models using a unique combination of datasets on grocery purchases. We find that the geographic market extent is positively associated with household demand elasticity and negatively associated with store profit margins. The maximum market extent at which changes in demand elasticities become statistically insignificant varies by retailers, ranging between 10 and 16 km. These findings are robust to alternative assumptions of store competition. Our results imply that overlooking the locality of retail competition can result in overestimating the magnitudes of household demand elasticities while underestimating store profit margins, characterizing a relatively more competitive market.

Original languageEnglish (US)
JournalAmerican Journal of Agricultural Economics
DOIs
StateAccepted/In press - 2024

Bibliographical note

Publisher Copyright:
© 2024 Agricultural & Applied Economics Association.

Keywords

  • control function approach
  • geographic market definition
  • mixed logit
  • retail competition
  • retail food markets
  • store choice

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