Who Benefits From Entry?

The arrival of high-end grocery stores in neighborhoods is a harbinger of gentrification. However, economic theory generally predicts that entry of firms is good for consumer welfare. This paper combines barcode-level retail data with a newly collected dataset on the opening dates of Whole Foods, a high-end grocery chain in the United States, in new neighborhoods, to estimate the effect of entry. I show that Whole Foods' entry causes prices to rise by three percent for households in the bottom half of the income distribution, while prices don't change for households in the top half of the income distribution. This finding is robust to changing the sample of stores and the set of control variables and to a falsification test using announcement dates instead of entry dates. Building on differentiated competition models, I show that this unexpected effect of entry can happen because incumbent stores catering to high-income households are closer to Whole Foods' assortment and therefore behave pro-competitively when Whole Foods arrives, while incumbent stores catering to low-income households are quite differentiated and are able to raise their prices. I then show evidence supporting this mechanism and show that alternative mechanisms do not seem to be supported by the data