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

Jason Blevins, Ahmed Khwaja () and Nathan Yang ()
Additional contact information
Ahmed Khwaja: University of Cambridge, Cambridge CB2 1TN, United Kingdom
Nathan Yang: McGill University, Montreal, Quebec H3A 0G4, Canada

Management Science, 2018, vol. 64, issue 9, 4070-4093

Abstract: We develop and estimate a dynamic game of strategic firm expansion and contraction decisions to study the role of firm size in future profitability and market dominance. Modeling firm size is important because retail chain dynamics are more richly driven by expansion and contraction than de novo entry or permanent exit. Additionally, anticipated size spillovers may influence the strategies of forward-looking firms, making it difficult to analyze the effects of size without explicitly accounting for these in the expectations and, hence, decisions of firms. Expansion may also be profitable for some firms while detrimental for others. Thus, we explicitly model and allow for heterogeneity in the dynamic link between firm size and profits as well as potential for persistent brand effects through firm-specific unobservable factors. As a methodological contribution, we surmount the hurdle of estimating the model by extending a two-step procedure that circumvents solving the game. The first stage combines semiparametric conditional choice probability estimation with a particle filter to eliminate the serially correlated unobservable components. The second stage uses a forward simulation approach to estimate the payoff parameters. Data on Canadian hamburger chains from their inception in 1970 to 2005 provide evidence of firm-specific heterogeneity in brand effects, size spillovers, and persistence in profitability. This heterogeneous dynamic linkage shows how McDonald’s becomes dominant and other chains falter as they evolve, thus affecting market structure and industry concentration.

Keywords: dynamic discrete choice; firm expansion; size spillovers; market dominance; retail chains; persistence in profits; particle filter; serial correlation; conditional choice probability estimation; unobserved heterogeneity (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2017.2814 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:9:p:4070-4093

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().