The costs of entry restrictions in retail trade

Fabiano Schivardi, Eliana Viviano, 30 April 2011

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Retail trade employs a sizable share of the workforce, i.e. around 10%, in all industrialised countries. In addition, all citizens buy the services provided by retailers. A more efficient supply chain, entailing, for example, longer opening hours, online shopping, or lower prices for the goods sold, will substantially improve the consumer's wellbeing. Understanding the determinants of the sectoral performance of retail trade is therefore very relevant from a policy viewpoint.

This is particularly important today, given the dramatic structural change that the sector has been undergoing over the last two to three decades, a period in which large outlets have progressively increased their market share at the expense of smaller stores. This trend has fuelled a heated policy debate. Based on urban planning considerations and to protect small, traditional stores, retail trade has indeed being subject to substantial regulation in all European countries, often in the form of entry restrictions for large outlets. It is then important to understand the economic consequences of such regulation.

Against this background, a small but growing literature has analysed the effects of various forms of regulation on sectoral performance in some EU countries. Bertrand and Kramarz (2002) for France, Viviano (2008) for Italy, and Sadun (2008) for the UK have studied the effects of barriers to entry to large outlets on sectoral employement at the local level. They all find that entry barriers depress employment. The evidence is more scant on other measures of sectoral performance. Griffith and Harmgart (2008), again for the UK, find that entry restrictions reduce the number of large supermarkets and that restrictive planning regimes are associated with higher food prices. Schaumans and Verboven (2008) study the highly regulated pharmacies in Belgium, where regulation is usually justified on the necessity to ensure availability of pharmacies over the whole national territory. They conclude:

Our overall conclusions are that an appropriate reduction in the regulated markups, combined with a removal or relaxation of the geographic entry restrictions, can lead to a large shift in rents to consumers (taxpayers) without the risk of reducing the availability of supply. This strongly indicates that the current regime of high regulated markups and restricted entry protects the private interests of pharmacies rather than the public interest.

In a recent paper (Schivardi and Viviano 2011) we have performed a general assessment of the effects of entry barriers for large outlets on sectoral performance in Italy. The Italian retail sector, which has a prevalence of traditional small stores, underwent a major regulatory change in 1998. A central feature of this reform is that it delegates the regulation of entry of medium–large stores to local authorities. As it turns out, local authorities chose very different approaches to entry regulation. In particular, most regions established stringent ceilings to the expansion of medium-large stores. This constitutes an interesting policy setting, as we can compare the sectoral performance across provinces with different degree of entry restrictions. We used as a measure of entry barrier the ratio between the local population and the entry ceilings for medium and large stores. The higher this value, the more stringent the entry regulation.

We compared retail trade firms’ performance at the local level before and after 2000, the year in which local regulations came into effect. We found that entry barriers play a substantial role. According to our estimates, large stores in the area at the 75th percentile of the barrier distribution recorded higher margins by about 8% with respect to those in the area at the 25th percentile. The same exercise for productivity implies a difference of about 3%. We also find that a stringent regulation depresses investments in technology, curtails employment, and increases labour costs in large stores. Finally, consistently with lower margins and higher productivity, prices of goods in the “food and beverages” retail sub-sector – the segment with the greatest presence of large stores – are higher the more stringent the entry regulation.

To exclude the possibility that regulation itself is determined by the local structure of the retail sector, we used political variables to model barriers variability across local markets. Specifically, we exploit the positive relationship between the barrier indicator and the local share of votes of the right-wing parties (traditionally supportive of the interest of small retailers) in the general elections. We find that the effects become even stronger under this specification.

Overall, the conclusions of the literature on the effects of entry regulations in retail trade are very consistent. Although the country, method of analysis and measures of performance differ between studies, they all arrive at the same conclusions. Entry barriers and restrictive regulation produce one category of winners and many losers. The winners are incumbents, who enjoy substantially higher profits. On the other side, economic efficiency and employment is reduced and consumers are harmed through a less efficient distribution system and higher prices. These results fit with the idea that anti-competitive regulation is the main cause of the large US–Europe difference in productivity growth in the service sector in the recent years. Moreover, differences in productivity growth between the US and Europe have been greatest in retail trade, which alone explains a large fraction of the total gap (Gordon 2004; van Ark et al. 2002).

Of course, economic efficiency need not be the only determinant of entry regulation. For example, urban planning considerations are central in shaping the development of the large outlets. Supporting small shops in city centres or in remote villages might entail a social value. Still, in regulating the sector, policymakers should be aware that, at best, they are facing a stringent trade off. Restricting entry leads to substantial efficiency costs.

References

Bertrand, M and F Kramarz (2002), “Does entry regulation hinder job creation? Evidence from the French retail industry”, Quarterly Journal of Economics, 117(4): 1369-413.

Gordon, R (2004), “Why was Europe left at the station when America’s productivity locomotive departed?”, NBER Working Paper 10661.

Griffith, R and H Harmgart (2008). “Supermarkets and planning regulation”, CEPR Discussion Paper 6713.

Sadun, R (2008), “Does planning regulation protect independent retailers?”, CEP Working Paper 888.

Schaumans, C and F Verboven (2008), “Entry and regulation: evidence from health care professions”, RAND Journal of Economics, 39(4):949-972.

Schivardi, F and E Viviano “Entry Barriers in Italian Retail Trade”, Economic Journal, Volume 121, pp. 145-170, 2011.

van Ark, B, R Inklaar, and R McGuckin (2002), “Changing gear, productivity, ICT and services industries: Europe and the US”, Groningen Centre for Development and Growth, Research Memorandum No. GD-60.

Viviano, E (2008), “Entry regulations and labour market outcomes: evidence from the Italian retail trade sector”, Labour Economics, 15(6):1200–1222.

Topics: Competition policy
Tags: Italy, retail sector, supermarkets

Fabiano Schivardi

Professor of Economics, University of Cagliari; Research Fellow, EIEF

Eliana Viviano

Economist, Bank of Italy