How vital choosing the right setting is to the success of a retailer.

For decades academic studies and plain common sense have reinforced the old saw about “location, location, location.” New research by Seethu Seetharaman of Rice University’s Jesse H. Jones Graduate School of Management uses econometrics — the confluence of economics and statistics — to come up with a model that more deeply explains the factors that determine which locations are most profitable. A clue: It’s not just about where the most people live. The research also provides a model for understanding price competition among firms in the same geographic area.

It has long been understood that where a business chooses to set up shop is a big factor in determining whether it will sink or soar. The cliché about “location, location, location” being vital isn’t verified just by common sense; academic researchers a few decades ago produced study after study proving its importance.

In fact, the necessity of a retailer choosing a good spot is such a given that it hasn’t been studied much at all in recent years. That is, until Seethu Seetharaman, an associate professor of management at Rice University’s Jones Graduate School of Management, took up the topic with Tat Chan and V. Padmanabhan, whom he had previously worked with at Washington University in St. Louis. Their hope was to take an approach that used a mixture of economics and statistics — known as econometrics — to come up with a model that explains what factors really determine why retailers choose locations and provides a better understanding of price competition among companies in a certain geographic area.

Seetharaman and his colleagues opted to tackle the topic of location — and perhaps offer some guidance to companies as they wrestle with their own site dilemmas — by studying the geographic placement of 226 gasoline retailers in Singapore. While it might sound like an obscure choice, from a research perspective Singapore was much more straightforward than the United States. “In the U.S. we have what is called a ‘free entry market,'” said Seetharaman. “If you think about gasoline retailing, Exxon or

Shell or whoever is free to choose where they locate their gas stations, subject to zoning laws.” In Singapore, however, there’s essentially a self-contained market — the country is surrounded by water on three sides and borders Malaysia on another — and a central planner chooses locations based on how to best serve citizens’ needs.

Based on the past research, Seetharaman and his co-authors knew that population would be important — where people live, retailers necessarily will follow. But one of the major findings of the study is that population is only one of many factors — others include the median income of an area, how many cars were sold in that area and how close the neighborhoods were to Singapore’s airport, downtown and major highways. “We found a multidimensional view of what explains the dispersion of gas stations across Singapore,” said Seetharaman. In fact, according to their study, local demographic factors are vital in understanding which stations are most profitable. “Even if there are many local competitors, being in an attractive neighborhood counts for more than being a monopoly in a sparse neighborhood.”

The second purpose of the project besides location, Seetharaman said, was to delve into the nature of price competition among the gas companies — whether it was cutthroat competition, where companies were selling gas at cost and making no profit, or some form of collusion to keep prices and profits high. “Because whatever we find is going to be useful for the Singapore government for antitrust situations going on,” he said. “[It] is going to guide them in their thinking of whether to come down on these gas firms or not.”

Through some creative research techniques, the research team discovered that retail margins on gasoline in Singapore are around 21 percent. “I don’t know if you call it collusion, but it certainly is not fierce competition,” said Seetharaman. Besides providing the government with research and a model that can be used for potential antitrust action, the policy implications of the study are even more widespread. For instance, by creating their model around locations, Seetharaman and his colleagues can provide guidance on where the government should locate new gas stations.

The research has relevance not just to the government. “Suppose Shell or Exxon were to come to us. We can tell them which locations would be more profitable potentially.” While the model the researchers developed to study location can be applied only in situations where a central planner is making the ultimate decision, the pricing approach is highly adaptable. “The pricing component of our model can be used to understand price competition in any industry in the U.S. or anywhere else,” he said.

For more information at http://www.explore.rice.edu>