Wednesday, June 11, 2014
Matias Busso (Inter-American Development Bank) and Sebastian Galiani (University of Maryland) discuss The Causal Effect of Competition on Prices and Quality: Evidence from a Field Experiment.
ABSTRACT: This paper provides the first experimental evidence on the effect of increased competition on the prices and quality of goods. We rely on an intervention that randomized the entry of 61 retail firms (grocery stores) into 72 local markets in the context of a conditional cash transfer program that serves the poor in the Dominican Republic. Six months after the intervention, product prices in the treated districts had decreased by about 6%, while product quality and service quality had not changed. Using a theoretical model, we arrive at the conclusion that the poor segments of the population in these markets care the most about prices and much less about quality. Our results are also informative to the design of social policies. They suggest that policymakers should pay attention to supply conditions even when the policies in question will only affect the demand side of the market.