Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa

This paper investigates a determinant of location choice for multistore retailing firms: the trade-off between the business-stealing effect and the cost-saving effect from clustering their own stores. I present an empirical model of network choice by two multistore firms. I use lattice-theoretical results to address the computational burden of solving for an equilibrium in store networks. The framework integrates the static entry game of complete information with post-entry outcome data while using simulations to correct for the selection of entrants. I present an application of the model to the case of the convenience store industry in Okinawa Island, Japan, using unique cross-sectional data on store networks and revenues. I use parameter estimates to examine the impact of a hypothetical horizontal merger on store configurations, costs, and profits. Results suggest a retailer's trade-off between cost savings and lost revenues from clustering its stores is positive across markets and negative within a market. I find an acquirer of a hypothetical merger of two multistore firms would decrease its number of stores in suburbs but increase its number in the city center.