We study how local grocery prices within a city are affected by changes in housing markets. Our empirical strategy is based on an exogenous shift in the spatial distribution of construction activity induced by a large-scale, place-based tax exemption in the city of Montevideo. We provide instrumental variable estimates showing that the relative price of grocery goods decreases in areas within the city that experience more residential development: the estimated elasticity of grocery prices to newly-built residential space lies between -3 and -4%. Using a multi-product model of imperfect competition, we show that this negative effect can result from either an expansion in product varieties or firm entry. We report evidence supporting the varieties channel, with new residential development causing an increase in varieties of groceries available locally, and evidence of changes in the composition of stores.

---

20 January 2022     Paper Number CEPDP1822

Download PDF - Local retail prices, product varieties and neighborhood change

This CEP discussion paper is published under the centre's Urban programme, Neighbourhoods programme.

This publication comes under the following theme: Housing