Superstores or Mom and Pops? Market Size, Technology Adoption and TFP Differences

Most theories of total factor productivity (TFP) emphasize production-side frictions, such as barriers to technology adoption. I argue that for the retail sector, which employs around one-fifth of the private workforce, cross-country TFP

differences are driven instead by demand-side factors. I hypothesize that in developing countries, the use of highly productive large-scale retail formats, such as hypermarkets and supermarkets, is limited by low household income and high household transportation costs. Thus less productive ”mom and pop” stores are used more widely in poorer countries. I formalize my theory in a spatial model of technology adoption in which market size drives the mix of retail formats used and retail sector TFP. When parameterized, the model suggests that market size could account for roughly one half the retail TFP gap. I argue that policies which deter car ownership reduce the size of the market for large-scale retail stores, and I calculate that removing such policies could lead to sizeable TFP gains.

For more information, contact Dirk Krueger.