QUANTIFYING THE COMPETITIVE IMPACT OF A NEW ENTRANT

Quantifying the impact on sales and profits of existing firms due to a competitive entry is an important practical problem from both a managerial and a policy perspective. In this article we apply the well-known gravitational model to measure the sales impact of the planned entry of a new shopping center. The use of the model in this context is illustrated through two actual applications. Data were collected from a telephone survey of a random sample of local households. Respondents were asked a variety of questions about their shopping behavior, including their ratings of the attractiveness of the new and existing malls. In addition, we collected the usual data on mall size, travel time. population size, etc. The gravity model was formulated as a logit model and estimated by the well-known maximum likelihood procedure. It was found that mall choice could be explained by a simple model that used the following three variables: mall size, travel time, and the attractiveness of the mall. The estimated model was then used to quantify the competitive impact of a new shopping center under alternative scenarios. The article concludes with some recommendations on the practical use of such models.