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The Role of Spatial Demand on Outlet Location and Pricing

In this article, the authors consider the problem of outlet pricing and location in the context of unobserved spatial demand. The analysis constitutes a scenario in which capacity-constrained firms set prices conditional on their location, demand, and costs. This enables firms to develop maps of latent demand patterns across the market in which they compete. The analysis further suggests locations for additional outlets and the resultant equilibrium effect on profits and prices.

In this article, the authors consider the problem of outlet pricing and location in the context of unobserved spatial demand. The analysis constitutes a scenario in which capacity-constrained firms set prices conditional on their location, demand, and costs. This enables firms to develop maps of latent demand patterns across the market in which they compete. The analysis further suggests locations for additional outlets and the resultant equilibrium effect on profits and prices.

Costs are biased upward when capacity constraints are ignored. Using the analysis to suggest locations for entry, the authors find that properly accounting for spatial effects and capacity constraints leads to an entry recommendation that improves profitability by 66% over a model that ignores these effects.

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