Surviving Competition: Neighbourhood Shops versus Convenience Chains

Abstract

Abstract Hundreds of millions of microenterprises in emerging economies face increased competition from the entry and expansion of large firms that offer similar products. This paper examines the impacts of the opening of chain-run convenience stores on one of the world’s most ubiquitous microenterprises: owner-operated shops. To address endogeneity in time and location of chains’ opening, I pair two-way fixed effects with a novel instrument that shifts the profitability of chains but not of shops at the neighbourhood level. Expanding the number of chain outlets from zero to the neighbourhood average of 6.7 stores reduces the number of shops by 15%, a decline driven not by increased shop exits but by decreased shop entries. Shops retain their sales of fresh products and keep 96% of their customers, but customers visit shops less frequently and spend less on packaged goods. Surviving shops leverage competitive advantages stemming from being owner operated, such as lower agency costs, cultivating relationships with neighbours, and offering customers informal credit. The welfare gains of convenience chains replacing shops increase with household income; the poorest households experience a welfare loss.