Abstract

The arrival of global retail chains in developing countries is causing a radical transformation in the way households source their consumption. This paper draws on a rich collection of Mexican microdata to estimate the effect of foreign supermarket entry on household welfare and decomposes this effect into six channels. We find that foreign entry causes large welfare gains for the average household predominantly driven by a reduction in the cost of living—both through price reductions at domestic stores and through the direct consumer gains from foreign stores. These gains are, on average, positive for all income groups but are regressive.