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June Seminar



Fragmented Markets and the Proliferation of Small Firms: Evidence from Mom-and-Pop Shops in Mexico


Daniel Ramos-Menchelli (Harvard University),
Diana Sverdlin Lisker (Massachusetts Institute of Technology)



Diana Sverdlin Lisker


Wednesday, June 14, 2023

11:00 – 12:00 PM (EST)


HYBRID SEMINAR: Webex and Room F-3K-E-400



Link to Paper

The retail sector in developing countries is dominated by small firms. We explain this fact with a spatial model in which high transport costs lead to small effective market sizes and, consequently, the proliferation of smaller and lower-quality firms. We show that low costs of entry are key for this result. With a new, confidential panel of firm-level data surveying the universe of mom-and-pop shops in Mexico, we test the predictions of our model. We exploit the deregulation of the Mexican gasoline market in 2017 as an exogenous shock to consumer transport costs. Where gas prices increased, the number of mom-and-pop shops differentially increased while their average size and quality fell. We provide evidence of fragmentation as the mechanism driving these effects. With our estimated model, we evaluate the welfare consequences of a licensing program that increases costs of entry for mom-and-pop shops. We show that the presence of fewer stores in the market yields a 1.4% welfare gain.

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Meeting number (access code): 2309 680 7915

Meeting password:  ppWPAf4679a

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