The Agglomeration-Differentiation Tradeoff in ... - Yale University

Next, a consumer shopping for groceries likely frequents locations where multiple
grocery stores are collocated (store agglomeration effect). Hence, we consider the effect of the
total number of competing stores at the location, Nl. We also consider any scope economies of
shopping within the grocery sector when grocery stores with different formats collocate (format
agglomeration effect). For instance, consumers may be more likely to visit a particular Food and
Drug store when it is located close to a Supercenter. Hence, we use an indicator, OF
I fl , for the
presence of store formats other than the focal format f, and we also allow the format
agglomeration effect to be format-specific. Finally, consumers may simply have a strong
intrinsic preference ( α f , Pref ) for the store format f and there could also have an unobserved
preference for the location, η gl . Formally, for a consumer in CBG g, the utility of shopping in
stores with format f in location l is:
U = Uˆ+ η
gfl gfl gl
ˆ =− + + ln + + + (9)
OF
and U Tvl α comm α ( pr ) α N α , I α ,
gfl gl MS l pr fl SA l f FA fl f Pref
We assume i.i.d. Type 1 extreme value distribution for the preference shock so that the
probability that a consumer in CBG g will shop in stores with format f in location l is given by
the standard logit form:
p
=
csr
gfl F
exp
∑ ∑
f '= 1 csr
j∈Lg ( Uˆ
gfl )
exp(
Uˆ
gf ' j )
where, the superscript ‘csr’ for the probability denotes that this is the choice probability of
consumers. We put a cap on consumers’ choice set by specifying that consumers may shop at
12
(10)