Non-price Spatial Competition on Retail Market

The research provides a theoretical model, aimed to the explanation of the retail market formation specificity. Its mathematical description and economic sense combine classical Hotelling and Huff approaches in order to predict the spatial structure of the retail market by its agents’ incentives and urban environment patterns. Therefore, the research might be said to relate both to imperfect market theory and to urban economics field. Precisely, the main idea lies on retailers’ simultaneous choice of location and size that leads to Hotelling-like spatial competition, added by rental costs to each retailer’s shop area. In the context of the model, we can treat the size of any supermarket as either the area of an outlet, or the share of wholesalers’ production, provided there, or consumers’ “love-to-variety” parameter. Naturally, the other side of the modeled system considers homogeneous consumers, solving for the best shop in terms of their utility, specifically decreasing on transportation cost and increasing on the size of a chosen shop. Unlike the most of theoretical models, particularly working out the optimal pricing, the proposed one ignores price competition in order to take aside the communication with wholesalers. This also corresponds to the underlying assumption that consumers are not sensitive to insignificant prices’ variation. Moreover, in this sense, we follow the original Huff research, highlighted just two factors, confidently affecting consumers’ decision – those mentioned that are implemented endogenously to the current model. As a result, the simplest model, describing duopoly in the static game, leads to the existence of some asymmetric equilibria and to the explicitly derived unique symmetric equilibrium. The latter depends on consumers’ distribution specificity, a value of fixed rental costs to retailers and transportation costs parameter. Additionally, the research provides a social welfare analysis.