Large Plant Openings and Retail Prices

Abstract

We show how the opening of a large plant affects local income inequality by focusing on a new mechanism: retail inflation. Using detailed barcode-level prices, we show that local retail prices increase in winning compared to runner-up counties after large plant openings. We develop a model of monopolistic retail firms with variable mark-ups and non-homothetic consumer preferences and show that consumers become less price-sensitive as they substitute shopping time for more working time in response to rising labor demand generated in the local economy after large plant entry. We show that local retail firms respond to less elastic consumer demand by raising their markups. Our reduced-form evidence shows that establishing a large plant entry only increases the wages and labor hours of certain high-skilled workers but it increases overall county-level prices, thus creating larger increases in income inequality in winning counties compared to runner-up counties. Our results highlight how a firm's location decision impacts local communities.

Keywords: Large Plant, Retail Inflation, Firm mark-ups, Spatial Inequality, Skilled and unskilled workers

JEL Classification: R11, O18, E31, J22