Economies of Scope in Retail Distribution: A Study of Ready-to-Consume Categories

We develop a method to estimate discrete games where firms make a large number of interdependent discrete decisions, based on the optimal-transport inference framework of Li and Henry (2025). We apply it to retail distribution choices in carbonated beverages, tea, and yogurt, where firms decide whether to enter and if so, which products to sell in each local market. Using firms’ product-choice decisions, we derive product level bounds on incremental fixed costs under weak behavioral assumptions. These bounds allow us to estimate a fixed-cost function that accommodates economies or diseconomies of scope, so that the cost of adding a product may depend on a firm’s product portfolio. We find evidence for economies of scope, where the incremental fixed cost of adding a product is lower when the firm sells more products in the same local market. Counterfactual simulations show that these scope economies have important implications. First, policies that increase a market’s size raise consumer surplus primarily through the increase of incumbent firms’ product variety rather than through entry by new firms. Second, counterfactual mergers among small owners lead to fixed-cost savings, which raise product variety and consumer surplus.