Aha, and so it begins!

TL;DR:

I still think this will end up displaying all the normal reasons to think a municipal grocery store is a dumb idea: bad pricing incentives, inefficient transfers, and all that stuff. At the end of the day, we can’t eliminate trade-offs and scarcity. This is a competitive industry. The discount is unlikely to come purely out of profits.

(I routinely find myself not having much to say about these excellent Economic Forces pieces... comprehensive and thorough as is... no Den snark needed)

(uh-hu? Yea... I believe you. Good luck sourcing enough quantity... and rationing access...)

Who pays for the discount? What are the equilibrium responses? Where does adjustment occur when it cannot occur in the prices of those 20 items? Let’s think through the usual stuff: competition, transactions costs, fixed vs. marginal decisions.

Also, the no/low real estate and property tax expense is insane. I'm all in favor of establishments scrapping those bits but eeeh, doesn't really prove the efficiency of central planning then, does it?

The city will provide the locations. That means low- or no-cost real estate, initial building support, and relief from rent and property taxes. So there will be a huge subsidy on that portion, and bids to run the stores will be judged on what subsidies are requested, but we don’t know the formula.

"let’s take New York’s plan seriously and think through what we always think through.""let’s take New York’s plan seriously and think through what we always think through."

let’s start by assuming [government-run grocery stores] are equally efficient.
As always, start with the simple model. Imagine two stores. One private store becomes the government store, and the other remains private. Assume every household consumes a fixed grocery basket, so we’re not going to think about substitution across goods. Consumers are going to go to whoever supplies the cheaper basket relative to their transportation cost.

We have core items whose prices are “forced” low and the rest of the items. Suppose half of the $100 on a normal trip is on those core items, and the city is going to tell the store to cut that by 30%. The dollar value of that portion falls to $35. If nothing else changes, the $100 trip now costs $85. Yay, everything is cheaper! The advertised 30% discount has produced a 15% discount overall. [...] But the operator doesn’t sell a single product. It sells lots of products together. It’s going to raise prices on the non-core half until the total basket is back to $100.

In that world, nothing has changed. Every basket is the same price. Shopping behavior is the same. Even if some staples look like they’ve changed, consumers are no better off in this world because what they actually care about is the bundle.

Everything is efficient, etc. NEXT:

let’s relax the fixed-basket assumption. Suppose consumers are a little more responsive and non-core pricing isn’t going to undo the full discount, so the supported store’s total basket really does get cheaper. We can think of a variety of ways in which that happens. One possibility is that people shift toward the discounted core products, so the average bundle contains more goods with lower margins. The government store then has lower prices on average.

Enter competition, other stores shove down prices to (re-)attract customers

Sounds great! Everyone gets cheaper groceries! People going to the government store get the larger reduction, while people who stay at the private store still benefit from the competition that has driven down its prices.
we already know that these private stores have thin margins. With recurring fixed costs, it’s possible some are eventually driven out of business. In that case, this competitive pressure is weakened because the government store no longer has to compete with the private store. It can’t exercise its market power by raising prices on the core items, but it could still exercise its market power on all of those other goods.

Subsidies... Subsidies EVERYWHERESubsidies... Subsidies EVERYWHERE

Fixed contributions toward the site buildout and tax subsidies can help keep it operating, but they do not necessarily change the incentive to sell another basket.

This really turns the pricing into something like a two-part tariff, where you have kind of a fixed cost part of the pricing, and then you have your marginal cost pricing on the goods. Think of Costco as one example. Costco collects a membership fee and then charges very low prices inside the store. Maybe this is essentially what New York will do, but instead of membership fees, that fixed cost is coming from the government.

Shocking

They could be more efficient because they’ve been given a scale or a chance to reach a scale that’s generally not permitted in New York City. After all, New York City has kept out stores like Walmart, and these will presumably be five bigger stores. We also have all of the usual reasons for thinking that the stores would be less efficient.

Either the operator captures the gains...

If you provide only a fixed-cost subsidy and let the operator maximize profits, then it has an incentive to be efficient. In that world, we go back to the case above, where most of the fixed subsidy is captured by the operator.

...or

if the operator can’t maximize profit, or if the government claws back profits that it considers too high, then the incentive to minimize costs is weaker.

"Letting the operator claim the gains from lower costs encourages efficiency, but it also lets the operator retain some of those gains rather than pass them through to consumers.""Letting the operator claim the gains from lower costs encourages efficiency, but it also lets the operator retain some of those gains rather than pass them through to consumers."

aaah, the waiting-in-line price:

if there are still more shoppers than groceries, Barzel’s earlier work on rationing by waiting tells us what comes next. Shoppers will then have to bid through another mechanism, in this case, bid with time. The line grows until the full price (price + waiting for simplicity), on the margin, is high enough to ration the available groceries. The market clears one way or another.