The Welfare Impact of Retail Competition: Evidence from the Rise of Dollar Stores

This paper exploits the exponential expansion of dollar stores across the U.S. in the past two decades to characterize retailers’ competition strategies beyond pricing. Dollar stores are small-box discount stores that offer a broad range of products at low prices with a limited selection within each product category. This paper documents dollar store chains’ strategic choices of products against their major competitors, grocery stores: (1) dollar stores offer deeper price discounts for product groups with smaller assortment sizes; (2) deeper price discounts are associated with product assortments featuring a higher share of unique products and products favored by the middle-income; and (3) more products favored by the low-income and fewer product deals are available in product groups with smaller assortment sizes. Dollar store expansion affects local market structure by crowding out grocery stores. I specify and estimate a demand model, which incorporate consumers’ preference for product characteristics, to quantify the welfare impact of dollar store expansion for consumers of different incomes. Counterfactual analysis highlights the importance of non-price product characteristics in driving the growth of dollar stores. The estimated model also suggests that dollar store entry could be excessive and lessen consumer welfare, corroborating the existing placed-based dispersal policies on dollar stores.