The Role of Spatial Demand on Outlet Location and Pricing
Published 4/1/2009
Author: JASON A. DUAN and CARL F. MELA
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Executive Summary
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 conditioned 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.
Using Bayesian spatial statistics, the authors apply their model to seven years of data on apartment location and prices in Roanoke, Va. They find that spatial covariation in demand is material in outlet choice; the 95% spatial decay in demand extends 3.6 miles in a region that measures slightly more than 9.5 miles. They also find that capacity constraints can cost complexes upward of $100 per apartment. As they predict, price elasticities and costs are biased downward when spatial covariance in demand is ignored. 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.
Biography
Jason A. Duan is an assistant professor in the Department of Marketing, McCombs School of Business, at the University of Texas at Austin. Previously, he was a postdoctoral associate in Marketing in School of Management at Yale University. He received his PhD in Statistics and MA in Economics from Duke University in 2006. His articles have appeared in peer-reviewed academic journals, such as Biometrika and Biometrical Journal.
Carl F. Mela is a Professor of Marketing at Duke University. He received his PhD in Marketing from Columbia University. Before coming to Duke, he held management positions at Hewlett-Packard, Hughes, and Proxima. Professor Mela’s research focuses on the long-term effects of marketing activity, customer management, and the Internet. Articles along these lines appear in Journal of Marketing Research, Marketing Science, Journal of Marketing, Harvard Business Review, Journal of Consumer Research, and other journals. He has received nine best-paper awards from the Marketing Science Institute, INFORMS, the American Marketing Association, and other professional organizations. He is an associate editor at Marketing Science and Quantitative Marketing and Economics and serves on the editorial boards the Journal of Marketing, Journal of Marketing Research, Marketing Letters, and Journal of Public Policy & Marketing. Professional boards include the Word of Mouth Marketing Association and Information Resources, Incorporated. His home page is located at http://faculty.fuqua.duke.edu/~mela/bio.
J Marketing Research, Volume 46, Number 2, April 2009
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