Price Competition in Industries with Geographic Differentiation: Measuring the Effect of Location on Price in the Fast Food Industry

This paper analyzes the empirical relationship between prices in the fast food industry and the market structures and taste variations induced by the geography of the market. I do this by using price and location data, but no quantity data, to estimate a discrete choice model of demand and supply for fast food that accounts for the exact geographic configuration of firms. I use the estimated model to run counterfactual experiments to demonstrate how the location of a firm will affect its price. I find that consumers will travel about 1/3-mile to save $1. I also find that both geographic differentiation from competitors and the distribution of consumers around the outlet have significant effects on the equilibrium prices for fast food outlets. For example, I show that for one of the outlets in my market that moving the outlet to a location 1⁄2-mile away would change the price for a meal (with an average mark-up of $2.67) by 15¢. Also, joint ownership can significantly increase prices above those that would be charged under separate ownership, especially for the industry leader. This price increase can occur even when the co-owned outlets are located far enough apart that the firms would both charge monopoly prices had they been owned by different parties. Since the changes in prices that occur from joint versus separate ownership are the same as the differences that occur from a merger (of two franchisees belonging to the same chain), these results are suggestive of general anti-trust policy in markets with geographic differentiation.