Price competition and social welfare comparisons between large-scale and small-scale retailers?

Abstract

In some localities, a large-scale chain retailer competes against a small-scale local independent retailer that specializes in, for instance, vegetables, fruits, and flowers produced locally for local consumption. The former usually attracts consumers by emphasizing its width and depth of products variety, whereas the latter seeks to overcome its limited products assortment by offering lower prices for them than the chain store. This is possible for the local store partly because of lower labor costs and for various other reasons. This study employs the Hotelling unit interval to examine price competition in a duopoly featuring one large-scale chain retailer and one local retailer. To express differences in their product assortments, we assume that the large-scale retailer denoted by A sells two types of product, G1 and G2, whereas the local retailer denoted by B sells only G1. Moreover, we assume that all the consumers purchase G1 at A or B after comparing prices and buy G2 at A on an as-needed basis. We examine both Nash and Stackelberg equilibrium to indicate that the local retailer can survive competition with the large-scale chain retailer even if all the consumers purchase both G1 and G2. We also reveal that a monopolistic market structure, not duopoly, can optimize the social welfare if consumers always purchase both G1 and G2