Buyer Beware - Shopping Hours and Price Competition

Shoppers may benefit a lot in terms of convenience with longer opening hours. But as former INSEAD Associate Professor of Finance Roman Inderst and co-author Andreas Irmen demonstrate, the consumer is often left paying more - regardless of whether they choose a major outlet or a smaller independent retailer. Determining that research does not pay sufficient attention to opening hours as a core strategic variable among competitors. Inderst and Irmen's model focuses on this issue. Using a duopolistic spatial model they compare two hypothetical retailers, fully free to set their own opening hours. The results regarding pricing may surprise many scholars.

by Roman Inderst, Andreas Irmen
Last Updated: 23 Jul 2013

The greatly extended opening hours for retail outlets in many countries may offer shoppers a lot more convenience. But as former INSEAD Associate Professor of Finance Roman Inderst and Andreas Irmen of the University of Mannheim demonstrate via a spatial model describing dupolistic retail competition, the consumer is often left paying more.

Most existing theoretical literature concerning the short-term effects of opening hours deregulation has led to the development of ambiguous predictions as to how prices respond. Some studies emphasise the role of search for equilibrium prices by consumers. Deregulation thereby tends to lead to overall lower prices, as longer shopping hours permit shoppers more leisure for price comparing. Other studies lead to conclusions that prices tend to rise at larger stores with more access time, and fall as smaller outlets with shorter opening hours in an effort to attract more demand.

But in the authors' view, neither approach pays sufficient attention to opening hours as a core strategic variable among competitors. Inderst and Irmen's duopolistic spatial model studies this question with "space" and "time" as dimensions of horizontal product differentiation. They compare two hypothetical retailers with given spatial locations. Following opening hours deregulation, both are at total liberty to choose among three shopping hours regimes: daytime, nighttime or around the clock.

For this setting, the authors conclude that if consumers attach great value to considerations of time, the equilibrium configuration exhibits asymmetric shopping hours. That is to say: while one retailer uses this new legal freedom to open around the clock, the other is active only during the daytime. As the authors abstract from costs incurred when operating for more hours, this result is only driven by the retailers' desire to mitigate price competition. An asymmetric choice, therefore, ensures that demand is less responsive to price changes.

Moreover, by considering differing (linear) input costs, the authors also show that the retailer with a cost advantage is more likely to open around the clock. When interpeting differing input costs as reflecting shop sizes, larger outlets are more likely to open longer. But a surprising implication of the authors' analysis is that smaller outlets gain from deregulation, nonetheless.

European Economic Review, July 2005

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