# **1. Introduction**

Understanding the effects of market concentration on economic productivity and household welfare, poverty, and inequality has become a policy priority, especially in developing countries, which often have more concentrated markets.<sup>7</sup> In addition, a better understanding of the distributional effects of competition is central to policy making since poor households are typically the most affected by the lack of competition, given that they consume more homogeneous goods, have less opportunities to substitute consumption, and have limited access to markets (Creedy and Dixon 1998; Urzúa 2013). Moreover, policies fostering competition have the potential to provide a cost-effective and sustainable mechanism for poverty reduction, particularly compared with welfare interventions, such as social protection or fiscal policies.<sup>8</sup> Although most of the evidence in developed countries is typically centered on the effects of competition on economic productivity and prices, the rise of marker power and the capital share of income have received more attention in developing countries and have ignited the impetus of academics to conduct rigorous analysis on the causal relationship of market concentration and household welfare.<sup>9</sup> Atkin et al. (2018) analyze a regulatory reform in Mexico that allowed the entry of foreign retailers (Walmart supermarkets) during the 2000s by combining microdata sources and bar-coded information on prices. They find that an external source of market competition in local retail markets led to significant welfare gains (6.2 percent) for the average household. However, the positive welfare effects benefited richer households the most. The gains of these households were around 50 percent more than the overall welfare gains of the poorest households because the poor transfer less of their retail consumption to foreign stores. Similarly, Busso and Galiani (2019) take advantage of a random supply shock in the local retail sector in the Dominican Republic through the expansion of small grocery stores generated by the rollout of a social protection program and find significant welfare gains driven by a reduction in prices of about 6 percent. In addition, Urzúa (2013) estimates the distributive and regional effects of firms with market power in Mexico and finds evidence that welfare losses due to monopoly power are significant and larger, in relative terms, among lowerincome households and households in rural areas.

Such rigorous studies on the welfare effects of competition are intensive in data requirements—for example, price data, including barcode data; locally disaggregated data; data on the rollout of supply expansion, and so on—and resources, and usually depend on identifying natural experiments to measure impacts, though this may not be feasible in most developing countries. Moreover, undertaking reforms that improve competition through either the retail trade or regulatory reform are often fraught with political resistance because of concerns about likely adverse impacts on employment and incomes, especially among small local retailers. In such contexts, illustrative ex ante

> 7 Industries in developing countries tend to have high numbers of intermediaries and middlemen because of the lack of strong vertical links.

> 8 Evidence from Mexico points to the fact that higher local market concentration in the retail sector raises the extreme poverty headcount. An increase in one standard deviation in the Herfindahl-Hirschman index is linked to an increase of 1.13 to 1.59 percentage points in the Foster–Greer–Thorbecke headcount ratio (FGT0) for the extreme poverty line. Furthermore, in 2010, the program now known as Prospera reduced the poverty line by 2 percentage points, with 57 percent to 79 percent attributed to the effect of market concentration (Rodriguez-Castelan and Rodriguez-Chamussy 2018).

> 9 For instance, on the effects of mergers and acquisitions, see Connor (2014); Griffith and Harmgart (2012); Hausman and Leibtag (2007); Notaro (2014).

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