Local Retail Prices, Product Varieties and Neighborhood Change

We study how differences in retail prices within a city are affected by changes in local housing markets. Our empirical strategy is based on an exogenous shift in the spatial distribution of construction activity induced by a large-scale, place-based tax exemption in the city of Montevideo. We provide differences-in-differences and instrumental variable estimates showing that the price of retail goods decreases in areas within the city that experience more residential development. We use a multi-product model of imperfect competition to relate this change to an expansion in either product varieties or firm entry. We report evidence in support of the varieties channel, with new development causing an increase in varieties available locally. Our results have implications for urban planning policy and the broader discussion about winners and losers from neighborhood change.