Dynamic model of entry: Dollar stores

Abstract

Dollar stores have become the fastest-growing retail format in the United States. However, there is considerable controversy regarding their entry, particularly into markets without grocery stores, and concerns that dollar-store entry decisions are motivated by preemptive incentives. In this paper, we aim to study the market entry of dollar stores as an equilibrium phenomenon and to examine their impact on competing store formats in a dynamic environment. We use census-tract level data and develop a dynamic model of oligopolistic competition to estimate the impact of dollar store entry on the equilibrium entry decisions of other retailers of the same format and other formats. We find that supermarkets and other large-format owners thrive as dollar-store expansion removes their “competitive fringe” in shared markets, whereas other small-format stores (other dollar stores, convenience stores, and superettes) do not. Our findings have broad implications for the effect of dollar store entry on consumer welfare, as dollar-store entry is not associated with grocery-store exit but rather the exit of other small-format stores.