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Local Retail Prices, Product Variety, and Neighborhood Change
Fernando Borraz, Felipe Carozzi, Nicolás González-Pampillón, and Leandro Zipitría
American Economic Journal: Economic Policy. Feb 2024, Vol. 16, No. 1: Pages 1-33

Local Retail Prices, Product Variety, and Neighborhood Change†

Fernando Borraz1, Felipe Carozzi2, Nicolás González-Pampillón3 and Leandro Zipitría4

1Banco Central del Uruguay, Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República, and Universidad de Montevideo (email: )

2Department of Geography and the Environment; London School of Economics (email: )

3What Works Centre for Local Economic Growth—LSE and Institut d’Economia de Barcelona (IEB) (email: )

4Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República (email: )

Abstract

We study how local grocery markets within a city are affected by changes in housing markets. Our empirical strategy exploits a shift in the spatial distribution of construction activity induced by a large-scale, place-based tax exemption in the city of Montevideo. The introduction of new housing stock induced by the policy causes a reduction in grocery prices of 2.3 percent and an increase in locally available product varieties. Using insights from a multiproduct model of imperfect competition and estimates for different types of stores, we show these changes are the result of incumbents’ response to an increase in local demand. (JEL L81, O18, R22, R23, R31, R38)