Do we go shopping downtown or in the ‘burbs? q Philip Ushchev a,⇑ , Igor Sloev a , Jacques-François Thisse b,a,c a National Research University Higher School of Economics, Russia b CORE-UCLouvain, Belgium c CEPR, United Kingdom article info Article history: Received 18 July 2014 Revised 26 September 2014 Available online 22 October 2014 JEL classification: D43 L81 R10 Keywords: Shopping behavior Retailers Shopping mall Spatial competition Monopolistic competition abstract We combine spatial and monopolistic competition to study market interactions between downtown retailers and an outlying shopping mall. Consumers shop at either one marketplace or at both, and buy each variety in volume. The market solution stems from the interplay between the market expansion effect generated by consumers seeking more opportunities, and the competition effect. Firms’ profits increase (decrease) with the entry of local competitors when the former (latter) dominates. Downtown retailers vanish swiftly when the mall is large. A predatory but efficient mall need not be regulated, whereas the regulator must restrict the size of a mall accommodating downtown retailers. Ó 2014 Elsevier Inc. All rights reserved. 1. Introduction Competition between small downtown retailers and out-of- town shopping malls has important implications for the residential structure of cities and the quality of urban life. In particular, con- structing large shopping malls and supermarkets in suburbia has exacerbated the extent of urban sprawl and contributed to the hol- lowing out of city centers. In his classical work, Downtown, Fogelson (2005) writes that ‘‘the decentralization of the depart- ment store is one of the main reasons that the central business dis- trict, once the mecca for shoppers, does less than 5% of the retail trade of metropolitan areas everywhere but in New York, New Orleans, and San Francisco.’’ In this paper, we study this particular type of competition by developing a new framework that combines spatial competition (Hotelling, 1929) and monopolistic competition (Dixit and Stiglitz, 1977). The city has two marketplaces: one is located in the central business district and is composed of a large number of small retail- ers; the other is set up at the city outskirts and takes the form of a shopping mall run by a developer. Each downtown retailer is too small to affect the market outcome and treats its competitors’ strategies as a given. In contrast, the mall developer is a big player that can manipulate the market. Consumers are dispersed between the two marketplaces and bear specific travel costs to acquire the varieties available in each one. Though consumers’ shopping behavior has several determi- nants (Teller, 2008), we focus on two first-order forces affecting consumer attitudes: the love for variety and the traveling costs. The former denotes consumers’ desire to access a broad range of choices; the latter reflects the economic importance of shopping in consumers’ budgets. For example, in the United States, the fre- quency of trips for work and for shopping is similar, i.e., 23.6% ver- sus 21.8% (Couture et al., 2012). By combining spatial and monopolistic competition, we are able to disentangle the various effects triggered by those opposing forces. Although price differ- ence is another major determinant of consumer shopping behavior, our initial setting assumes that prices are the same in the two mar- ketplaces. This allows us to capture in a simple way a wide range of interactions between marketplaces. Furthermore, we show that http://dx.doi.org/10.1016/j.jue.2014.10.001 0094-1190/Ó 2014 Elsevier Inc. All rights reserved. q We are grateful to W. Strange and a referee for detailed comments and suggestions that have led to significant improvements in the paper. We also thank K. Behrens, A. Bucci, Y.-L. Cheng, J.J. Gabszewicz, P. Garella, G. Kosenok, M. Parenti, P. Picard, F. Robert-Nicoud, and K.-I. Shimomura for their comments and remarks. We acknowledge the financial support from the Government of the Russian Federation under the Grant 11.G34.31.0059. ⇑ Corresponding author. E-mail addresses: ph.ushchev@gmail.com (P. Ushchev), isloev@hse.ru (I. Sloev), jacques.thisse@uclouvain.be (J.-F. Thisse). Journal of Urban Economics 85 (2015) 1–15 Contents lists available at ScienceDirect Journal of Urban Economics www.elsevier.com/locate/jue