Does reducing spatial differentiation increase product differentiation? Effects of zoning on retail entry and format variety

Abstract

This paper investigates the impact of spatial zoning restrictions on retail market outcomes. We estimate a structural model of entry, location and format choice across a large number of markets in the presence of zoning restrictions. The paper contributes to the literature in three ways: First, the paper demonstrates that the omission of zoning restrictions in the extant literature on entry and location choice leads to biased estimates of the factors affecting market potential and competitive intensity. Second, the cross-market variations in zoning regulations helps us test and provide evidence for the theory that constraints on spatial differentiation will lead to greater product differentiation. Finally, we provide qualitative insight on how zoning impacts retail entry and format variety; in particular we evaluate the impact of prototypical zoning arrangements such as "centralized," "neighborhood," and "outskirt" zoning on entry and format variety.

Price Reactions to Rivals’ Local Channel Exits

“…A third literature stream, on agglomeration, suggests that firms colocate to take advantage of heightened demand (e.g., Marshall 1920, Stahl 1982, Wernerfelt 1994, Vitorino 2012, Datta and Sudhir 2013. Marshall (1920) makes the observation that consumers are willing to incur a substantial investment of time and travel when buying high-priced products.…”

Profit-increasing asymmetric entry

“…Seim (2006) assumes that profits are a linear combination of several factors and a linearly-decreasing function of the number of competitors, where the coefficient on the number of competitors is a function of the distance between the firm and each competitor. Singh and Zhu (2008); Ciliberto and Tamer (2009) and Datta and Sudhir (2012) also model profits as declining linearly in the number of competitors in their respective entry games. Similarly, Cleeren, Verboven, Dekimpe, and Gielens (2010) study inter-format competition and assume that profits decline with competitive entry, although they do not assume linearity.…”

Limited Location Options: Measuring Spatial Interactions among Retailers Under Zoning Restrictions

“…Zoning is an instrument for land use planning used by local authorities and refers to the practice of dividing land into areas which separate one set of land uses from another (e.g., residential, commercial, industrial, etc.). In addition, there are often more detailed regulations regarding what types of residences, industries, and commercial activities that are permitted on particular parcels of land (Datta and Sudhir ). Presumably, zoning can have significant effect on the location of economic activity since such regulations restrict the location options of businesses, by determining what kind of activities that can be performed on particular parcels, the densities at which such activities can be performed, and so on.…”