Borders, varieties and distribution costs: Evidence from a US-Canada retail chain

Using data from a large retailer operating in Canada and the United States, I examine how market size and retailer size at the local and regional levels shape the variety of products available to consumers at a given store. The average Canadian store carries many fewer varieties, and I show that this has a potentially large (negative) effect on consumer welfare for Canadian (vs. American) shoppers. I propose a novel method to quantify the international difference in retail distribution costs and find evidence that they are much higher in Canada. Exploiting intra-national variation in market and retailer characteristics, I find that up to a quarter of the international variety gap can be explained by observed local and regional market characteristics that lead to larger retail scale in the United States. I also show that retailer scale has independent effects on product variety, conditional on market characteristics, and that manufacturer size and retailer size are substitutes in distribution.