Price Patterns in Competitively Clustered Markets

Abstract

In this paper, numerical analyses of price competition in spatial markets are presented. How equilibrium conditions are affected by the geographic distribution of firms and their pricing behavior is illustrated. Simulated and empirical findings suggest that clustering of competitors in space tends to promote lower overall price levels. It is posited that competitive market clusters may be responsible for the adoption of lower price conjectures. In theory, this suggests that the spatial structure of a market can create context-specific price-reaction functions that are sensitive to the relative locations of firms and distance to nearest and next-nearest rivals. Point-pattern and nearest-neighbor analyses of store locations for rival food chains in a major metropolitan market show that rivals tend to cluster in space, and that chain outlets in competitive market clusters demonstrate a tendency to support lower prices.