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.

Firm Expansion, Size Spillovers, and Market Dominance in Retail Chain Dynamics

“…Recalling the law of motion for Z imt as defined in (3), for each firm i in each market m we can think of increments to Z imt being decomposed into three primary components as Z imt = µ im + δ i Z im,t−1 + ϵ imt , where 32 We thank an anonymous referee for providing us with this insight. 33 Given the computational burden we bootstrapped the standard errors using 96 replications (two replications per core on each of four 12-core machines) with replacement from the sample of 31 markets for 36 years. …”

“…We report bootstrap standard errors. 33 To avoid reporting very small numbers, coefficients on terms involving N are reported as coefficients on N/100, with corresponding scaling factors being used for variables involving N 2 and N 3 .…”

Empirical games of market entry and spatial competition in retail industries

“…35 The most common assumption (e.g., Seim, 2006, Zhu and Singh, 2009, Datta and Sudhir, 2013 is that these unobservables are common across locations in the same local market (i.e., ℓ for all ℓ). Under this assumption the magnitude of unobserved market heterogeneity matters whether the firm enters some location in this market but not which location.…”

“…To avoid this problem, Seim (2006) uses population weighted centroids rather than (unweighted) geometric centroids. An alternative approach to avoid this problem is to draw a square grid on the entire city and use each square as a possible location, as in Datta and Sudhir (2013) and Nishida (forthcoming). The value of consumer demographics in a square block is equal to the weighted average of the demographics at the census tracts that overlap with the square.…”

“…These areas include those with some particular natural features (e.g., lakes, mountains and wetlands) or where commercial space is prohibited by zoning. For example, Nishida (forthcoming) excludes areas with zero population, and Datta and Sudhir (2013) remove areas that do not have any big box store as these areas are very likely to be zoned for either residential use or small stores.…”