Abstract
Firm entry into local markets has often been studied using administrative areas such as municipalities as the assumed relevant markets. However, administrative areas and the actual relevant markets based on local demand for firms’ products often do not coincide, which could bias the results of studies treating administrative areas as the relevant markets. Based on a behavioral assumption regarding how retailers act when purchasing products from wholesale trade firms, we create alternative markets using Voronoi diagrams. We then compare the empirical results of investigating the determinants of firm entry using municipalities as the relevant markets with the results obtained using Voronoi markets. The results indicate that, in both cases, the same variables are statistically significant in affecting entry, though the estimated effects differ in size.
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Notes
See, for example, Pakes and Ericson (1998) for a comprehensive overview of the various econometric models employed in firm entry analysis.
From 1991 to 2009, NUTEK was a Swedish agency responsible for promoting economic and regional growth. In 2009, NUTEK and other government organizations in Sweden with similar responsibilities were restructured to create the new organization Tillväxtverket.
Note that if one could make reasonable assumptions to create the demand areas for individual firms in other industries, then the method suggested here would be general enough to be used for studying other sectors and industries as well.
Market Manager Partner is a consulting firm now merged with the business communication firm PAR. PAR acquired the firm data directly from the Swedish Patent and Registration Office.
These industries are defined using the European Union NACE standards.
The inclusion of multi-plant firms in the analysis would increase the number of relevant markets using the Voronoi technique, particularly in densely populated areas, where most plants are located. Meanwhile, the overall geographical pattern of the relevant markets would remain similar, geographically larger markets being found in northern Sweden and smaller ones in the south.
These indicator variables are omitted from the result tables to save space, but are available from the authors on request. In addition, Eq. (5) was estimated without NACE code-specific indicator variables to investigate whether the results are sensitive to model specification. The results of these estimations are similar to those reported below and are available from the authors on request.
The indicator variables for infrastructure and the presence of a university or university collage have in some additional estimations been replaced by the distance from the local market to the university or infrastructure. For all variables except the indicator variable for type of local government, the qualitative results remain the same as presented below, while the indicator variable for local government turns out to be statistically insignificant in these estimations. Since the Schwarz’s Bayesian information criterion clearly favors the models using the indicator variables when analyzing firm entry, the results using these indicator variables are the ones presented below. Results from the alternative estimations are available from the authors on request.
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Acknowledgments
We would like to thank participants at the 3rd Nordic Retail and Wholesale Association Conference in Lund, Sweden, as well as participants at the 7th HUI Workshop in Retailing, at Mälargården, Sweden, for valuable comments and suggestions. Financial support from the Swedish Retail and Wholesale Development Council is gratefully acknowledged.
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Brandt, D., Macuchova, Z. & Rudholm, N. Firm entry in the Swedish wholesale trade sector: Does market definition matter?. Ann Reg Sci 53, 703–717 (2014). https://doi.org/10.1007/s00168-014-0639-8
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DOI: https://doi.org/10.1007/s00168-014-0639-8