Productivity Dynamics and the Role of “Big-Box” Entrants in Retailing

Entry of large (“big-box”) stores along with a drastic fall in the total number of stores is a striking trend in retail markets. In this paper we provide a dynamic structural model, controlling for unobserved prices and local market characteristics, to estimate total factor productivity in retail markets. Then we evaluate how increased competition from large entrants influences incumbents’ productivity in local markets. Using detailed data on retail food stores in Sweden, we find that net entry substantially contributes to industry productivity growth. In local markets, productivity dispersion increases as a consequence of large entrants, i.e., low productive incumbents become less productive whereas high productive incumbents become more productive. We conclude that large entrants play a central role in explaining productivity differences across stores.