poly: When Your Grocer Knows Where You Live

The three most important issues for a small business are
"location, location, location." Few people will bother
to go to a grocer, video store, etc. that isn't one of the
closest to where they live. So what happens when such
local businesses learn where their customers live?

What happens is that they target coupons/discounts at
customers on the border between them and competing businesses.
This means you want to live halfway between grocers, rather than
right next to a grocer. It also means that prices are lower
on average, so profits are lower, so there end up being
fewer such businesses spread farther apart. And it turns
out that this is a good thing. For more details, see:

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http://hanson.gmu.edu/torustwn.pdf or .ps

Spatial Discrimination in Circular City, Torus Town, and Beyond

                  by Robin Hanson

Salop's "Circular City" model of spatial competition is generalized to
spaces of arbitrary integer dimension, and to transportation costs which are
an arbitrary positive power of distance. Assuming free entry, mill (i.e.,
non-discriminatory) pricing is compared to pricing which discriminates based
on a customer's location. For all dimensions above one, there is some
non-negative cutoff power below which there is too little entry and above
which there is too much. This cutoff power rises with increasing dimension,
and is larger under price discrimination. Mill pricing induces more entry
for powers of four or less, and less entry for powers of five or more.
Overall, too much entry is a more severe problem than too little. For
moderate powers and dimensions, this tends to favor price discrimination.
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Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323
Received on Thu Nov 4 22:45:29 1999