Spatial differentiation and market structure: The video retail industry

This dissertation studies firms' joint entry and location choices in retail markets where location choice constitutes a form of product differentiation. I employ geographic location as an easily quantifiable, representative measure of product differentiation and illustrate its importance for entry in one specific industry, the video retail industry.;Previous studies of entry have modeled the trade-off between the available demand in a market and the intensity of competition faced by a new entrant in that market due to its attractiveness to other competitors. However, the strategic importance of location choice within a market has received less attention.;Since rivalry decreases as products become less alike, the number of products that a market can support should increase with differentiation. Consistent with this hypothesis, the dissertation provides strong empirical support for a joint model of entry and location choice compared to conventional models that ignore product differentiation. Thus, a conventional model that posits identical firms is found to significantly understate the possible number of firms in a market.;I first develop a static equilibrium model that formalizes a firm's joint decision about entry and location choice as a game of imperfect information. The firm acts to maximize profits in response to its competitors' actions, but information regarding firm-specific profitability, such as the managerial talent of its competitors, is not known to it. This Bayesian framework has notable advantages over complete information models in terms of its ease of verifying and computing equilibria for a realistic, large-dimensional set of product types.;I then relax some of the restrictions of the basic static model by allowing for differences between firms beyond geographic location. Specifically, firms can further differentiate by choosing a "type", such as organizational structure, that captures systematic differences in profitability among competitors.;The empirical results imply large payoffs to spatial differentiation since only the closest rivals exert significant competitive pressure. Furthermore, this dissertation introduces a new framework for studying the importance of product differentiation on market structure; one that is adaptable to analyzing other industries where competition is characterized by large numbers of heterogeneous firms.