Sunday, September 11, 2005

Big Boxes

I know I'm not the only one who is annoyed that big-box retailers continually open mega-stores across the street from each other. In my part of the US the companies that do this as apparent standard practice are Home Depot and Lowe's Hardware, along with Target and Walmart. In other places different companies might also follow this practice.

The traditional reason retailers like to gather together is it helps to draw customers. Yet each of these big-box players is the draw that all the smaller retailers want to be next to. So that reason doesn't hold for the mega-stores. I can think of two reasons why they practice this form of competition and several reasons why they shouldn't.
  1. Lazy - Instead of doing their own market research they just ride the coat-tails of the first store to build in the area.
  2. Malice - The desire to inflict economic damage on a competitor regardless of if it helps their own bottom line or not.

What frustrates me are competitors that don't really compete. This summer I was working on a number of home projects and just can not understand why two companies that sell 85% the same items and are located right across the road from each other, also keep exactly the same hours. As a customer I am not benefiting from what appears to be the waste of several million dollars to put up a store but in no way offer significantly different service!

Of the reasons I give for these actions, "Lazy" should be self explanatory, and appears to be the one most people assume is taking place. However I am more inclined to believe that option two is the real reason. In industry this goes by the professional term "pissing contest."

Now for the reasons share holders (and city planners) should put an end to this behavior:
  • When one store is built across the street from an equal competitor, the best you can really hope for is to steal about 50% of their customers.
  • For the investment (these boxes must cost $5 to $10 million to construct) it would be money better spent to be in a location where there is less competition. Locating in areas where there is no other big-box competition could well give a bigger return for the money invested.
  • If these companies were more spread out, then they would have geographical appeal to the people who live closer to their store. The customer benefits since for 1/2 of them it cuts the drive time in half to get to a store satisfying their needs.
  • It benefits the city by not concentrating the traffic on just a few over loaded streets, and likely would lead to a decrease in emissions from cars due to less congested traffic conditions.
It would take a better mathematician than I to prove it, but I believe the work of John Nash shows this to be irrational behavior. Both city planners and company share holders have something to gain by ending this "contest."
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Blogger Nick said...

Actually, identical pricing, or hours, is a sign of very good competition. In perfect competition, you have to match the the other player's terms exactly, or risk losing all the customers. I think you would call this a Nash stable equilibrium.

In theory, this minimizes prices.

9/20/05, 11:44 AM  
Anonymous Anonymous said...

It could be a Nash equilibrium or it could be price fixing. Or perhaps price fixing is an example of an equilibrium.

9/20/05, 1:27 PM  

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