This paper evaluates the impact of entry regulations on stores' incentives to reposition product variety and long-run performance. We estimate a dynamic model of product repositioning, where stores use a multiproduct service technology to generate sales. Using rich Swedish data on stores and product categories, we find that more liberal regulation spurs repositioning in product variety, driven by a new mechanism of cost reductions and effciency gains. Counterfactual simulations show that modest liberalizations of entry incentivize incumbents to adjust the product categories offered to consumers while increasing sales per category. Generous liberalizations of entry induce net exit of product categories in markets with limited demand. Cost subsidies can help to reduce regional differences, allowing consumers and incumbents to obtain more long-term benefits, especially in rural markets.
