Agglomeration economies in urban retailing: Are there productivity spillovers when big-box retailers enter urban markets?

Previous studies have found that big-box retail entry does not affect the productivity of incumbent retailers when entry occurs in urban areas. In this paper, we show that there are positive spillover effects of big-box retail entry to incumbent retailers in urban areas as well, but that these are limited to relatively small retailers, making the effects difficult to detect using traditional econometric methods, such as difference-in-difference estimation on the full sample of firms. In a two-step procedure, we first use panel smooth transition regression to determine size thresholds that delimit incumbent retail firms by their possible reactions to the new big-box entry. We then use difference-in-difference estimations on these subgroups of firms to determine, within each group, the direction and magnitude of the effects of big-box entry on their productivity. For the group of small incumbent retailers, we find positive spillover effects on productivity of approximately 9%.