This paper evaluates the impact of entry regulations on stores’ incentives to adjust product variety and long-run performance. We use rich Swedish data on stores, product categories, and local regulations to estimate a dynamic model of endogenous product offerings where stores utilize multiproduct service technology to generate sales. The median long-run benefit of adding one more product category is approximately 20 percent higher in restrictive markets than in liberal markets. A more liberal regulation spurs repositioning and increases product variety, driven by a new mechanism of cost reductions and productivity gains. Counterfactuals show that modest liberalization of regulation induces 6.6 percent of stores to add categories in rural markets, where category entry accounts for 2.3 percent of all products. Strong liberalization enhances category entry in markets with restrictive regulation but less in rural markets with limited demand. Lower costs of adjusting variety imply more category entry and less category exit, whereas shutting down the productivity channel reduces variety. Incumbents’ long-run profits decrease from more intense competition, whereas stores that adjust their product variety gain a larger market share.
