Retailing in Competitive Environment


Rajul Bhardwaj
(BCA, Msc(Math), MBA)
Sr. Lecturer & H.O.D.
Doon Institute of Management & Research
Shyampur, Rishikesh, Dehradun (U.A.)

Our analysis concludes firstly that competition problems are likely to be particularly prevalent in retailing, and secondly that there are significant differences between retailing and other areas of the economy, but that these differences are a matter of degree rather than exclusive to retailing. This means that, while the emphasis of competition policy will often be different in retailing, there should be no need for any major change in general competition policy methodologies.

However, in the process of analysing competition policy in retailing, we have discovered certain difficulties in applying some of the existing general methodologies. This does not mean that retailing requires separate methodologies, but rather that the current general methodologies need to be amended. This leads us to recommend that:

* Competition enquiries should always start with an identification of the relevant competition issues and then proceed with a preliminary analysis of demand and supply factors, particularly of the general characteristics of consumers and the dimensions of retailer competition;

* Market definition should ensure that the identification of the relevant market or markets serve to clarify the competition issue and that the retailer market is separately identified from the product market; and

* Existing approaches to vertical restraints need to be refined with respect to the increased role of retailers in their establishment and enforcement.

The nature of retailing:

Retailing is the final link between the production of a good and the end-consumer. The economic characteristics of the end-consumer are thus crucial to the economics of retailing. Typically, the end-consumer can be characterised as being:

1 Small (in the sense that the size of a given purchase forms a small part both of the consumer's total expenditure and of the retailer's total sales);
2 Immobile (in the sense that they are often not able or willing to travel long distances in order to purchase the appropriate product); and
3 Uninformed (in the sense that they often do not know which products are available where, and what prices; and they may not be able to observe product quality in advance of purchase). The combination of these characteristics explains essentially why retailers exist.
The fact that consumers' purchases tend to be small means that retailers play an important role in preventing the exploitation of consumers by manufacturers: no single consumer would have any bargaining power against powerful manufacturers, whereas retailers can bargain strongly on their behalf.1
The fact that consumers are immobile means that retailers play an important function in bringing the products to the consumers, to prevent the consumer from having to go to the product.
The fact that consumers are uninformed about the availability of products, their prices, and their qualities means that retailers carry out an important service in terms of providing information and quality assurances.
These characteristics also explain many aspects of retailing. For example, consumers' immobility means that geographical location and one-stop shopping will be important, while their lack of information means that price visibility, product range, and reputation/quality assurances will be important.
These aspects of retailing feed straight into a discussion of the nature of competition in retailing. We identify four dimensions of horizontal competition between retailers:
1 Pricing;
2 Geographical location;
3 Product selection; and
4 Retailer service.
These various dimensions in retailing have important consequences for competition policy, and it is crucial, when considering competition in retailing, to examine all of these dimensions.

A framework for assessing competition in retailing :

Competition problems are likely to be particularly prevalent in retailing, since markets will only tend to work imperfectly when there are asymmetries in bargaining power (consumers are small), high transactions costs (consumers are immobile), information asymmetries (consumers are uninformed), or vertical restraints.

Indeed, there have been numerous cases where the OFT and MMC had to look at competition in retailing. The issues typically covered include:

1 Pricing issues (including excessive pricing, discriminatory pricing, predatory pricing, and loss leading);
2 Merger issues (for which market definition is crucial); and
3 Vertical issues (including vertical restraints, differential discounting, and own-brand competition). In order to analyse these various issues, we suggest the following framework:
1. Identification of competition issues
2. Preliminary analysis of retailing:
- the characteristics of consumers; and
- the dimensions of competition between retailers.
3. Market definition
4 Barriers to entry
5 Competition assessment:
- market structure and merger issues;
- pricing issues; and
- vertical issues.

Identification of competition issues

We suggest that at the outset of every enquiry the competition issues are clearly identified. Each step in the assessment of competition in retailing has to be considered in the context of the specific competition issue, and cannot be dealt with in isolation. Some competition issues (such as those resulting from a merger between retailers) are easily identified, whereas a more general complaint of excessive prices for a class of products may require an in-depth investigation of both the retailing and the wholesale/manufacturing element of the supply chain.

Rajul Bhardwaj
(BCA, Msc(Math), MBA)
Sr. Lecturer & H.O.D.
Doon Institute of Management & Research
Shyampur, Rishikesh, Dehradun (U.A.)

Source: E-mail June 30, 2005


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