Friday, December 31, 2021

Retail Markups and Discount-Store Entry

Retail Markups and Discount-Store Entry


Lauren Chenarides

Arizona State University

Miguel Ignacio Gomez

Cornell University - Food Industry Management Program

Timothy J. Richards

Arizona State University W. P. Carey School of Business

Koichi Yonezawa

Cornell University - Dyson School of Applied Economics and Management



"Hard discounters" are retail formats that set retail food prices even lower than existing discount formats, such as Walmart and Target. Offering limited assortments and focusing on store-brands, these formats promise to change the competitive landscape of food retailing. In this paper, we study the effect of entry of one hard-discount format on markups earned by existing retail stores, focusing on several important grocery markets across the Eastern U.S. Focusing on establishment-level profitability, we estimate store-level markups using the production-side approach of De Loecker and Warzynski (2012). We find that hard-discounter entry had the expected effect of reducing margins from similar stores, but did not affect markups earned by stores in the same market that are likely to appeal to a different market segment. In general, hard-discounter entry reduced markups for incumbent retailers by 7:3% relative to markups in non-entry markets. These results indicate that the net effect of hard-discounter entry reduces the overall level of store profitability, regardless of higher sales realized by incumbent retailers.

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