Econometric diagnosis of competitive localization

Abstract

Competitive localization is present in an extreme form in one-dimensional spatial models; each brand faces only two rivals no matter how many brands are on the market. A test that does not require unrealistically long data series is proposed for detecting the presence of localized competition in markets with differentiated products, and a simple technique for assessing the nature and importance of such localization is presented. Application of these methods to data on the U.S. ready-to-eat breakfast cereal industry suggests their potential value in other contexts.