Retail Markups and Discount-Store Entry

• Published in: Review of industrial organization Vol. 64; no. 1; pp. 147 - 181
• Main Authors: Chenarides, Lauren, Gómez, Miguel I., Richards, Timothy J., Yonezawa, Koichi
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.02.2024; Springer Nature B.V
• Subjects: Agriculture; Competition; Discount department stores; Economics; Economics and Finance; Elasticity of demand; Food; Food prices; Grocery industry; Grocery stores; Growth models; Industrial Organization; Markets; Microeconomics; Prices; Profitability; Retail industry; Retail stores; Retailing; Sales; Supermarkets; Production economics; D43; Discounters; Markups; Retail pricing; M31; Food retailing; L13
• ISSN: 0889-938X; 1573-7160
• DOI: 10.1007/s11151-023-09926-w

“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 (Am Econ Rev 102(6):2437–2471). We find that hard-discounter entry reduced markups for incumbment 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—despite the somewhat higher sales realized by incumbent retailers.