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Location-Price Equilibria when Traditional Retailers Compete Against an Online Retailer
1Department of Economics and Finance, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy.
Review of Industrial Organization
|May 10, 2021
Summary
This study analyzes a location-then-price game involving traditional and online retailers. Traditional retailers engage in direct competition, locating at intermediate distances, with prices influenced by relative competitiveness.
Area of Science:
- Business Strategy
- Microeconomics
- Retail Competition
Background:
- Traditional retailers face competition from online retailers whose location is irrelevant.
- Understanding equilibrium dynamics in mixed retail environments is crucial for market strategy.
- Previous models often simplify the spatial and pricing strategies of competing firms.
Purpose of the Study:
- To analyze a location-then-price game with two traditional retailers and one online retailer.
- To characterize the equilibria of this competitive retail market structure.
- To determine the strategic positioning and pricing outcomes for all involved retailers.
Main Methods:
- Game theory modeling, specifically a location-then-price game.
- Equilibrium analysis to identify stable strategies for retailers.
- Comparative statics to examine the impact of relative competitiveness on prices.
Main Results:
- Direct competition between traditional retailers is an inherent feature of all equilibria.
- Traditional retailers strategically choose intermediate locations, avoiding extremes.
- Online retailer pricing can be higher or lower than traditional retailers' prices, contingent on competitiveness.
Conclusions:
- The spatial and pricing strategies in a mixed retail environment are complex.
- Intermediate locations and direct competition are key equilibrium characteristics for traditional firms.
- Relative firm competitiveness significantly dictates price outcomes in the retail market.
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