Essays in Spatial Competition

This dissertation presents three essays in spatial competition. Each of these essays uses data from a franchised chain of pizza delivery stores to examine different aspects of spatial competition. While each of these essays studies a different aspect of spatial competition there are certain unifying themes that run through all of them. They each examine the role and determinants of local and distant ownership in a market with spatially dispersed stores and consumers. In this industry, chains (including the chain our data came from) maintain a network of stores that contain both locally-owned, or franchised, stores, and distantly-owned, or corporate, stores. Each chapter empirically explores a different facet of how these ownership structures fit into a framework of spatial competition.;Chapter 1 examines the relationship between local knowledge of demand fluctuations and local ownership. If local owners know more than distant owners about the ever-changing demand conditions in their area, this could be an important driver of the extensive use of franchising in geographically dispersed retail chains. However, the empirical literature has been unable to find evidence that franchisees do in fact know more about local demand, much less test whether such knowledge is a determinant of franchising. Therefore, this chapter examines whether franchised outlets in a U.S. pizza delivery chain know more about local demand fluctuations than company-owned outlets do, as revealed by their pricing behavior. We find that franchisees are indeed better informed about local demand. Furthermore, while we find evidence that franchisee pricing is responsive to fluctuations in local demand, there is no evidence that company-owned stores are responsive to local demand fluctuations at all.;Chapter 2 explores what factors determine which outlets in a major U.S. pizza delivery chain are franchised, and which are retained as corporate stores. Franchising is a pervasive organizational form, particularly in retail chains. Most large franchised chains strive to maintain a fixed proportion of company-owned stores, and what determines which stores they franchise is the subject of a large and contentious literature. Many of the entries in this empirical literature generally focus on only one of these determinants, or on one cluster of them. This chapter takes a multivariate approach, empirically studying a number of these determinants, and obtaining results consistent with a cohesive theoretical framework. We find that corporate stores are concentrated in metropolitan clusters. Controlling for this, we further find that: (1) The common empirical result of higher sales at company-owned stores vanishes. (2) Franchised stores tend to be in locations skewed towards carry-out, and the higher relative importance of unobserved cost control effort for carry-out seems likely to be the reason. (3) Franchised stores tend to have a higher density of delivery rivals, supporting the theory that the presence of near substitutes favors franchising. (4) Areas with more volatile carry-out demand favor franchising, supporting the theory that volatile demand favors the more responsive pricing of franchisees, which dovetails nicely with our findings of more responsive pricing by franchisees (for delivery) in chapter 1.;Chapter 3 examines whether locally bought ads are more effective at driving sales than nationally bought ones are. Considering the vast sums firms spend on advertising, surprisingly little is known about the effect that advertising actually has on sales. In the first chapter of this dissertation we provided evidence that locally owned outlets were able to incorporate knowledge of current local demand shocks into their pricing decisions. It would then stand to reason that they could also incorporate this knowledge into their advertising decisions, resulting in a higher impact of advertising on sales. Therefore, in this chapter we test whether locally bought ads have a greater effect on sales than nationally bought ones do. We do this using a rich panel dataset that enables us to isolate variation in advertising exposure that is completely exogenous. We find that locally bought ads do indeed have a bigger impact on sales than nationally bought ones do.