Why are Walmart and Target Next-Door neighbors?

•Big Box stores have substantially altered the U.S. retail sector over the last 25 years.•This analysis tests two competing hypotheses of Big Box firm location.•New Big Box stores avoid market areas with existing own-firm stores, and areas with complementary stores.•However, there is little evidence that prior existence of competitors deters new Big Box entry.

One of the most notable changes in the U.S. retail market over the past twenty years has been the rise of Big Box stores, retail chains characterized by physically large stores selling a wide range of consumer goods at discount prices. A growing literature has examined the impacts of Big Box stores on other retailers and consumers, but relatively little is known about how Big Box stores choose locations. Because Big Box stores offer highly standardized products and compete primarily on price, it is likely that they will seek to establish spatial monopolies, far from competitor stores. In this paper, I examine where new Big Box stores locate with respect to three types of existing establishments: own-firm stores, other retailers in the same product space (competitors), and retailers in other product spaces (complements). Results indicate that new Big Box stores tend to avoid existing own-firm stores and locate near complementary Big Box stores. However, there is little evidence that new Big Boxes seek to avoid competitors. Firms in the same product space may not be perfect substitutes, or firms may prefer to share consumers in a desirable location rather than cede the entire market to competitor firms.