In a small neighborhood on the outskirts of Santo Domingo, a new grocery quietly opens its doors. Within weeks, prices at nearby shops fall and customers report better service. Far away, in Mexico City’s sprawling suburbs, the arrival of retail chain stores tells a similar story. As convenience-store chains spread from 2,000 to more than 23,000 outlets over two decades, they force hundreds of thousands of tienditas (small shops) to adapt—or fade away.
Competition, these examples from IDB studies show, is clearly good for consumers and can make a big difference in thin markets where only one or a few sellers dominate. But as larger players move in, it can also lead to local welfare losses as small shops close their doors and their employees lose their jobs. The policy challenge is both ensure competition and to help firms and workers adjust.
These dilemmas and many other issues related to market power, competition, and their consequences are probed in the IDB’s soon-to-be-released Development in the Americas flagship report.
The Benefits of Competition in Retail Markets
The study in the Dominican Republic shows some of the clear benefits of competition. In that experiment, researchers worked with the Dominican Republic’s conditional-cash-transfer program, which paid benefits through local grocery outlets. The government randomly authorized 61 new shops to join the network across 72 small markets, creating an unusually clean test of what happens when new shops move into an area where there had previously been little or no competition.
The result was unambiguous. Prices fell by about 6% for basic goods, and households accessed products of higher quality. Shops that lost exclusivity reacted quickly, improving service to retain their clients. Because entry was randomized, the researchers could attribute these effects squarely to competition itself, not to changes in demand or income.
The mechanism was textbook: lower markups under fiercer competition. And the setting—thin markets serving poor households—was highly significant. In many low-income areas, a single merchant effectively controls the local supply chain. The study shows that even one entrant can shift that balance, transferring purchasing power directly to consumers.
Convenience Chains and the Reshaping of Retail Markets in Mexico
If the Dominican trial revealed how competition among small firms works in specific neighborhoods, the study in Mexico zooms out to the national scale. Using two decades of Mexican economic census and household-survey data—covering every one of the country’s 600,000 neighborhood stores—the paper measures how the rapid rise of convenience chains reshaped retail markets.
To separate cause from correlation, the study exploited how chains benefit from economies of scale and from locating on high-traffic streets. By bringing these features together, the author built an instrument that predicts where chains expand for cost reasons rather than local demand.
The typical urban Mexican neighborhood went from zero chain stores to about seven over 20 years. That expansion cut the number of tienditas by roughly 15%, almost entirely because fewer new ones opened rather than because existing ones closed. Neighborhood-level revenues and profits in the small-shop sector fell 20% to 30%, though surviving shops saw only modest declines. Consumers kept visiting their local stores but did so less often and spent less on packaged goods. Purchases of fresh produce, bread, and pastries barely budged.
Why? Because those are the items where small shops hold their edge: freshness, convenience, and informal credit. The tienditas least affected by chains tend to be smaller and owner-operated, relying on close relationships with customers, a tailored product mix, and personalized lending.
The Effects of Greater Competition Depend on Context
Together, the two studies trace a development trajectory familiar to economists. In thin markets, where a few sellers dominate, entry yields unambiguous efficiency gains: prices fall, quality improves, and welfare rises. But as markets deepen and large players scale up, competition reallocates activity in ways that are harder to judge. Aggregate efficiency gains may coexist with local losses in economic welfare.
The policy challenge is not to shield incumbents but to design competition that maximizes net welfare. That means lowering entry barriers and ensuring competition while helping firms and workers adjust. In the case of workers, for example, that can involve facilitating their reallocation toward expanding and more productive firms through measures like skill-development initiatives, job-matching services, and social safety nets that ease their transitions to new employment.
The lessons extend beyond retail. Similar dynamics appear in transport and other services where scale economies meet fragmented local providers. Traditional competition policy—focused on mergers and cartels—needs to be complemented by measures that promote firm entry, diffusion, and productivity upgrading. The question is not whether competition is desirable, but how to make markets competitive, allowing high-productivity small and medium firms to survive, grow, and challenge dominant incumbents.
The forthcoming 2025 IDB Development in the Americas 2025 report, Markets for Development: Improving Lives through Competition explores this broader agenda. Its premise is straightforward: competitive markets are a precondition for productivity growth and inclusion. The Dominican and Mexican evidence illustrates both sides of that equation: competition as a mechanism for efficiency and as a driver of development.
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