Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Store size, variety and welfare

Nicholas Li

Last modified: 2012-05-11


With CES preferences, access to a greater variety of goods increases the welfare of consumers. Following the seminal work of Feenstra (1994) and Broda andWeinstein (2006,2007) who examine changes in variety over time, I examine the cross-sectional variation in variety available to consumers atdifferent stores in a major American supermarket chain. Using scanner data I find significant variation in variety availability that is highly correlated with store size. The elasticity of consumer welfare with respect to store size is 0.025-0.035. I use a simplemodel of monopolistic competition with CES preferences and fixed costs to illustrate why a retail chain would choose different sizes for its stores. Increasing variety in this model is costly to the chain but also increases the firm’s share of total household expenditures by loweringthe effective price index facing households who shop there. Using data on store-level covariates to capture variation in local market characteristics I find empirical support for the qualitative predictions of the model.

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