S. Chan Choi

(Rutgers Business School, Newark, NJ 07102, USA)

 

 

Abstract: When a branded retailer decides to add a new store, one major decision is the distance of a proposed location from its competitors. It is widely believed that one of the advantages of a free-standing location is the absence of nearby competition which a shopping-mall location typically faces. We are interested in examining whether the absence of nearby competition is indeed an advantage when there is a spill-over effect of advertising. The proximity between the two stores affects how much of one store’s informative advertising “spills over” to the other store. When the stores are located close to each other, a fraction of consumers who are informed of only one retailer will decide to “shop around” between the two differentiated but substitutable stores. We show that, when advertising is relatively cheap, it can be more profitable to have competing stores located close to each other and let a certain fraction of partially-informed consumers shop around.

 

 

Key words: marketing; store location; informative advertising; retailing

 

JEL codes: M310, M370