A Model of Competition between Mom-and-Pops and Supermarkets with Heterogeneous Goods

Abstract

Abstract Consumers have access to a larger range of goods when shopping at large-scale supermarkets. One-stop shopping provides supermarkets with a competitive advantage over mom-and-pops as demand-side economies of scope allow consumers to save on traveling costs. The purchase frequency of goods, an often-neglected factor in the literature, affects the competition among stores as more frequently purchased goods involve more trips and, therefore, higher traveling costs. We set up a model of spatial competition between a large supermarket and mom-and-pop selling goods of different purchase frequencies by relaxing the one-stop shopping assumption. Mom-and-pops’ profit function is shown to be supermodular and expresses the complementarity between the purchase frequency of the good and access to consumers. Competition in the land market leads mom-and-pops to locate close to consumers and to sort across locations in descending order of the purchase frequency of the good they are selling, while the supermarket is located further away, where land is cheaper. Furthermore, we also show that mom-and-pops, selling seldomly-purchased goods, are more exposed to competition with the supermarket and are eventually driven out of the market.