Rasmusen Weblog

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.