Redistribution through local competition

Abstract

Small shops located within walking or cycling distance of consumers have, in many communities, been relegated to the status of convenience stores, with high prices and limited product selections. Consumers who don't have cars are thus disadvantaged. Is this a necessary state of affairs? We develop a model with two kinds of shops (local, and out-of-town) and two kinds of consumer (mobile and immobile). We assume that local shops operate in monopolistic competition, while the market structure for out-of-town shops is a stable oligopoly among large retail chains. We show that policies which raise the net cost (price plus consumer travel costs) of shopping out of town may cause a discontinuous drop in the price level of local shops. The price drop is accompanied by both the entry of new local shops and a reduction of excess capacity in local shops. We draw the following conclusions from the model: to the extent that local shops serve a poorer clientele, a rise in prices at out-of-town shops will have a progressive distributional effect if it results in the local price reduction predicted here. Moreover, the same measures have the potential to improve allocative efficiency through a combination of reductions in local excess capacity and the internalization of social and environmental costs of automobile use