Dollar General opening may be a symptom, not a cause, of negative local market conditions

Dollar stores have a bad reputation for negatively impacting local communities (see here and here, for example). Some communities have pushed back, resisting the opening of new stores. One thing that dollar stores are accused of is hurting other local businesses, but is that the case?

That is the question addressed in this new article by Amelia Biehl, Amir Ferreira Neto (both Florida Gulf Coast University), and Juan Gomez (University of Iowa), published in the journal Economic Modelling (ungated earlier version here). They focus on the opening of new Dollar General stores in Florida, using data from Dun and Bradstreet's National Establishment Time Series dataset between 1990 and 2019. Over that period, there were a lot of store openings, with the state going from 202 stores to 1014 between 2000 and 2019. That's about one store per 23,000 people in Florida by the end of the period.

Biehl et al. look at the impact on revenue, employment, and probability of firm closure, by comparing firms operating within a half-mile of a new Dollar General store opening (the 'treated firms'), with firms operating between one and 1.5 miles away (the 'control firms'), in what is termed a difference-in-differences analysis. Biehl et al. limit their focus to firms with fewer than 50 employees, as they are more likely to be impacted by the opening of Dollar General. This still results in a sample of over 7.5 million observations of over 1.1 million firms. The hypothesis is that these small firms operating in close proximity to the new Dollar General store will be affected by its opening, whereas small firms located further away will not be.

Their results are summarised in Figure 4 from the paper, which shows an event study version of the analysis:

That figure shows the impact on each variable (revenue, employment, and probability of firm closure), year-by-year, from eight years before the store opening to eight years after. Focusing on the time after the store opening (from time zero onwards, because time -1 is the year of store opening), the positive and significant effects show that employment increases, revenue increases, and the probability of firm closure increases for treated firms compared with control firms after the store opening. These results are consistent with the overall difference-in-difference results.

However, there is a slight problem here. One of the assumptions of difference-in-differences is that there are parallel trends - that treated and control firms would have followed similar paths in terms of revenue, employment, and probability of closure, if no Dollar General store had opened. Obviously, this is impossible to establish for sure, because we don't know the counterfactual (we don't know what would have happened if Dollar General had not opened). But there is one indicator that is often used to argue in favour of parallel trends, which is to look at the estimated coefficients from the time period before the treatment started. If those coefficients are statistically insignificant, it establishes that there is little evidence that the treatment and control firms were diverging before the Dollar General even opened. But for this analysis, that isn't the case. Take a look back at Figure 4 shown above. There is a clear trend in the coefficients even before Dollar General opened, and that trend appears to continue through to the period after the Dollar General opens. If anything, the coefficients at time -1 (which is the year of opening) are unusually inconsistent with the coefficients on either side of them.

The failure of this analysis to consider a violation of the parallel trends assumption should make us very cautious about taking these results at face value. At least, I don't think they should be interpreted as showing that Dollar General leads to the closure of some local businesses, with the surviving firms having higher revenues and employment (which is how Biehl et al. interpret their results). Instead, I think it possibly shows that Dollar General stores locate in areas where stores are already closing (notice in Figure 4 that probability of closure is already positive and statistically significant for treated firms compared with control firms before the Dollar General opens).

Biehl et al. go on to look at the impacts on firms by industry and by retail category. However, given that their headline results don't really show what they are purported to show, I would place even less weight on the industry-specific results. Besides which, at that stage of the analysis they are doing multiple comparisons, meaning that some of their results might show up as statistically significant simply by chance, which they haven't adjusted for.

Overall, the results from the main analysis in this article are consistent with Dollar General finding new locations where there are open storefronts (because other firms have already closed), and setting up shop in those locations. So, it may be that it isn't the Dollar General that causes firm closures, and higher revenue and employment for surviving firms, but something else like local market conditions more generally. Considering that possibility, a Dollar General opening would be a symptom of those negative local market conditions, not a cause of them.

Who is morally responsible for grade inflation?

This article in The Conversation last year by Ciprian N. Radavoi, Carol Quadrelli, and Pauline Collins (all University of Southern Queensland) pointed me to their interesting article published in the Journal of Academic Ethics (open access) on who is morally responsible for grade inflation. The article attracted my attention because it engages moral philosophy in the task of identifying responsibility for grade inflation, a problem that I have blogged about before.

Radavoi et al. start by noting that grade inflation is unethical, relying on three main normative ethics theories: (1) deontology; (2) virtue ethics; and (3) consequentialism. As they explain:

In a deontological perspective, the problem with grade inflation is that it is a dishonest action...

A virtue ethics approach further substantiates grade inflation as unethical... As for what counts as virtues (that is, excellent traits of character), there have been numerous lists proposed in the history of philosophy, and courage, integrity and justice feature in most... regardless of the reason one inflates grades, that person does not act as a just person... It is easy to see how the act of equally rewarding with top marks hardworking and lazy students is unequal treatment that shows social irresponsibility, and fails to show leadership...

As for consequentialism, Radavoi et al. note all of the parties that are potentially harmed by grade inflation, including students whose grades are inflated (because they are "disincentivised from studying, shielded from the educative experience of failure, and instilled with a false sense of success"), employers (because grades become less valuable as a signal of the quality of job applicants), universities (whose reputations are damaged when they become known to be merely 'diploma mills'), and society generally. On the latter, Radavoi et al. note that:

If academic teachers do not fulfill their gatekeeping role, society will end up with incompetent doctors who may damage someone’s health, incompetent lawyers may ruin someone’s wealth or liberty, and so on. Also, if grades lose their quality of correctly indicating achievement, society will lose its trust in higher education and in universities as places of learning and excellence.

Having established grade inflation as unethical, Radavoi et al. then present the qualitative results from a survey of Australian academics, in the form of quotes from open-ended questions from the survey. This highlights the role of management coercion, and student evaluations of teaching , with the latter often being the mechanism through which management pressure is applied to academics. Radavoi et al. then unpack whether academics are manipulated into grade inflation, or coerced, concluding that:

...at least for casual academics, it seems safe to say they inflate grades under coercion, and this mitigates their moral blameworthiness: indeed, the coercive pressure on them, exercised via SETs, is insurmountable given the insecurity of their position and the overwhelming desire to secure another contract.

In contrast, in Radavoi et al.'s view, academics with continuing employment are generally not coerced into grade inflation, as those academics have greater agency to take a stand against grade inflation. Of course, context matters, and I suspect that there are not a lot of academics who feel genuinely secure enough in their employment to take a stand against university management on principle. I know from personal experience that even when a senior academic is willing to take a stand on behalf of a larger constituency of academics, those other academics will not necessarily voice their support in a public forum (and yet, simultaneously, be very willing to thank the senior academic in private). Taking a stand against grade inflation is only one example. Top-down one-size-fits-all rules imposed on teachers and their subjects, and enforcing onerous levels of flexibility that suit students but impose high costs on staff in terms of workload and administration, are other examples where pressure from university management has been applied, and yet academics have not effectively resisted. However, I am getting off topic.

Radavoi et al. do highlight that moral responsibility for grade inflation cannot be attributed solely to the academics responsible for grading. The institutional context, and management pressure (whether manipulation or coercion) are important too. However, Radavoi et al. do not consider the extent to which students are also implicated in this situation, albeit in a different way from academics or university management. As higher education has increasingly treated students as consumers of education services, successive cohorts of students have increasingly been encouraged to adopt the ideal of the ‘sovereign customer’, able to demand that education providers deliver particular outcomes for them. It is hardly surprising, then, that some students come to see higher grades not only as something to be earned, but as part of the education services that they have paid for. This does not make students primarily responsible for grade inflation, but it does mean that student expectations can reinforce the pressures placed on academics and university management.

So, perhaps moral responsibility cannot be attributed solely or largely to university management either. All three parties (academics, university management, and students) each bear some responsibility for grade inflation. However, that responsibility is not necessarily shared equally. The greatest responsibility should fall on those with the greatest power to change the incentives that make grade inflation attractive to students, convenient for managers, and sometimes the least risky option for academics. Which party bears the greatest responsibility will depend crucially on context.

Read more:

• Teaching evaluations and grade inflation
• Grade inflation is harming students' learning
• A few papers on grade inflation at universities
• Grade inflation and college completion in the U.S.
• More on teaching evaluations and grade inflation
• Grade inflation at New Zealand universities, and what can be done about it

How home loan customers can use switching costs against the banks

Economists often consider switching costs to be a problem for consumers. High switching costs can lock a consumer into buying a particular product, or lock them into buying from a particular seller. Often, the seller extracts additional profits from their locked-in customers by charging them a higher price, or selling them complementary products. However, sometimes locking in can benefit consumers, especially when they can play off one seller against another, where both sellers want to lock the customer in. Consider the example of banks, on which the New Zealand Herald reported last month:

Home loan borrowers are taking cashback incentives to stay with their current banks, as competition continues in the mortgage market.

The focus on cashback incentives intensified through the end of last year, when ANZ offered cash payments equal to 1.5% of loan amounts to new home loan borrowers.

In a competitive environment, banks really want home loan customers, and are willing to pay to attract new customers. Retaining their existing customers is important too, and banks may be willing to pay to keep their customers. However, not all customers will be able to extract the same 'retention payments' from their bank. The bank needs to weigh up how likely it is that they will lose a customer:

Helen Stuart, a mortgage adviser at Compass Mortgages, said she had seen “retention payments” offered by several banks lately, especially when someone had all their lending come off a fixed term...

It is harder to change to lenders when some of the loan is still fixed, because it usually means a break fee has to be paid.

That makes sense. When a bank customer has a fixed rate mortgage, they have to pay a 'break fee' in order to change banks. Their current bank can feel quite secure that the customer is going to stay with them, and so the bank is unlikely to offer a retention payment (or, if they do, any retention payment is likely to be quite small). On the other hand, when the fixed rate on the mortgage expires, the bank customer can change banks without paying a 'break fee', and so the bank would be more likely to offer a retention payment (or would offer a more generous retention payment). Of course, the retention payment itself is likely part of the bank’s lock-in strategy, since cashbacks often come with conditions that make future switching more costly to the customer.

Thinking further:

Jeremy Andrews, of Key Mortgages, said what people could get would depend on how long a customer had had their loan, whether they had taken a cashback previously and whether they had more than 20% equity.

“Some banks will refuse retention cash if the clients are already fixed in and they see it as of no benefit to the client to refinance to another bank. Some examples include if it’d be detrimental either in break fees – they’re already on higher than market rates, or if they would need to move to higher rates in the market, or the legal costs associated exceed any cashback benefit of moving.

So, in general, the bank is weighing up how likely it is that the customer will change banks. If changing bank would lead the customer to end up paying a higher interest rate on their mortgage, the bank infers that the customer is less likely to leave, and the bank will therefore be less likely to offer a retention payment. It is a similar story if legal costs are high - the customer is less likely to move, and the bank will be less likely to offer a retention payment.

Bank customers should be savvy about this though. Any time that they have the 'upper hand', through low switching costs, they could use their position to extract a large retention payment from their bank. This happens when their home loan comes off a fixed rate, and especially when other banks are offering enticements for the customer to switch. Of course, they need to consider not just the retention payment, but the interest rate, break fees, legal costs, the hassle of switching, as well as whether accepting the retention payment locks them in and for how long. If it makes sense overall, then playing off the banks against each other may allow the home loan customer to reverse the logic of switching costs to their advantage.

The Australian government has 'subscription traps' in its sights

As I noted in a post last week, firms are increasingly selling subscriptions rather than products because consumer inertia can make them substantially more profitable. Once a customer starts a subscription, they tend not to cancel the subscription as soon as they should, simply because it requires some thought and attention (as well as a little bit of time) to execute a cancellation of the subscription. This 'customer inertia' is a form of switching cost, which locks customers into buying the subscription. However, sellers can easily amp up the switching cost by making it more difficult (and therefore more costly) to cancel. This makes customer lock-in more effective, and can 'trap' customers into their subscription.

In this article in The Conversation last year, Jeannie Marie Paterson (University of Melbourne) provides a couple of examples of 'subscription traps', each of which represents an instance of the firm increasing the switching costs for the consumer:

One example is when consumers sign up for a service quickly and easily online, but can only cancel on the phone (sometimes needing to ring another country)...

Another example, known as “confirm shaming”, involves requiring consumers to click through multiple screens before they can cancel.

Typically, each of those screens has a message asking consumers to reconsider, often reiterating the service’s purported benefits and even offering new discounts on the price not previously available.

When the switching costs are higher for the consumer, the customer lock-in is more effective (it is harder for the consumer to cancel, or switch). The firm can then profit through selling at a higher price, or by selling complementary goods and services to the locked-in consumer.

It is deceptively easy for a consumer to get locked in as well. I'm sure that you will have been offered the first month free on a subscription. That is how the firms get you. Firms often offer subscriptions at a low price initially (or free), then once the consumer is locked in, the firm can raise the price (this is referred to as multi-period pricing).

However, governments are wising up to the 'subscription traps' that Paterson highlights. She notes that:

Making it hard to cancel – commonly called a “subscription trap” – isn’t currently illegal. But now the federal government has announced a plan to ban subscription traps and other hidden fees.

Since then, the policy process in Australia has advanced, with draft legislation released in early 2026 that would impose disclosure, notification, and easy-cancellation requirements on subscription contracts from 1 July 2027, if the legislation is passed.

It is worth noting that banning subscription traps is not the only policy solution here. Anything that reduces the switching costs will likely be effective at reducing customer lock-in. One example that Paterson notes is:

California’s “click to cancel” rules also mean consumers must be able to cancel using the same method of communication they used to subscribe. And businesses must offer consumers information on how to cancel.

So, if signing up for a subscription requires a single click, then cancelling a subscription must also require a single click. That minimises the switching costs, and minimises customer lock-in. Making subscriptions easy to cancel would allow consumers to retain the genuine benefits of subscriptions (including lower transaction costs and fewer service interruptions) while reducing the unnecessary costs from subscriptions they no longer use. Firms may still be able to offer discounts or reminders to retain customers, but the cancellation process should inform consumers rather than obstruct them. Reducing these artificial switching costs is therefore likely to improve consumer welfare overall.

Read more:

• The subscription economy as price discrimination
• The switching costs of online subscriptions
• More on the switching costs of online subscriptions
• Cancelling subscriptions and customer lock-in
• Why do firms increasingly prefer to sell subscriptions, rather than products?