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August 24, 2004

Large Independent Bookstores vs. Smaller Chain Bookstores

The August 24 WSJ ($), p. A1, has this good industrial organization story.

When Neil Van Uum opened an independent bookstore in Cleveland last year, he was bucking the odds. Thousands of bookstores have closed in recent years, ravaged by huge rivals with larger selection and lower prices. One of the biggest -- Borders -- has a store right across the street from Mr. Van Uum's Cleveland site.

But the 46-year-old bookseller has managed to prevail thanks to an unusual retailing strategy: combat the giants by being even more giant. His Joseph-Beth Booksellers in Cleveland is bigger than the Borders, sells merchandise ranging from toys to quilted handbags and boasts a restaurant where flank-steak salad goes for $9.95.

How could this happen? A big chain ordinarily has standard procedures, including only a limited number of sizes of stores (if each store is different, there is no cost saving from having a chain, and in fact there would be a cost disadvantage). Suppose the optimal size of a bookstore in Cleveland is in between sizes 3 and 4 on Borders's list. That provides an opening for an independent store to come in at size 3.5.

Or, the story might be as follows. In markets like this, consumers go whichever bookstore is biggest, because they like variety in browsing and amenities such as wide aisles and lots of couches, so long as the store doesn't charge more than the cover price of books. If Borders makes a forecasting mistake and comes in at size 3, then someone else can come in at size 3.1 and wipe them out. Of course, if Borders can increase its store size to 3.2, this won't work, but often it is hard to expand buildings (you have to buy up the neighboring properties, for example, unless you bought wastefully much property in the first place). Or, the independent will jump right to the size-- say, 3.8-- which is so large that though it wipes out the old Borders, it is barely profitable because costs are so high. This would be a sort of "all-pay auction", to use the technical economic term.

Posted by erasmuse at August 24, 2004 02:40 PM

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