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The costs (and benefits) of shopping till you drop

Mohammad Amin's picture

Do non-workers increase competition in retail markets? A recent study (Amin, 2008) on retailing in India suggests that the answer is yes. The study shows that for each additional non-worker per household in the city, the level of competition increases by about 42% of its mean level.

(Disclosure for the methodologically inclined: The retailing study is based on firm-level data on 1,948 retail stores in 41 large cities of India collected in 2005 by the World Bank’s Enterprise Surveys, which gathers data on business climate, firm performance, and the like. Data on adult non-workers per household (averaged at the city level) are taken from the Census of India where adult non-workers are defined as those above 7 years of age and who voluntarily opt out of the labor market (neither working nor searching for a job).)

Competition and non-workers

The underlying motivation for the study is that competition in the retail sector depends on how intensively consumer-households search for the best prices and deals. Consumers look at the benefit and cost of time spent shopping and decide how much time to spend searching. Add to this the fact that internet shopping is still rudimentary in developing countries, and we’re quickly talking about a significant amount of time spent on comparison shopping.

As more people join the workforce as opposed to staying home, the opportunity cost of time spent shopping increases. This leads to a less intense search for best prices and therefore less competition between retailers. At the time of the data collection, the proportion of non-workers in Indian cities was fast dwindling due to an ongoing economic boom, suggesting some corrective measures were needed (and may be needed once the global economy revives). These could include promoting e-commerce, increasing store hours and lowering entry barriers.

This study of retailing falls within a broader literature that suggests that in consumer industries such as retailing, increasing the number of firms, preventing collusive behavior between firms and banning predatory pricing may not boost competition unless consumers are willing and able to search intensively for best prices and deals. This literature calls for competition policies that focus on consumer-behavior rather than firm-behavior (see Waterson, 2003).

A stunning example of this is a study by Giulietti et al. (2005), which shows that the recent deregulation of the U.K. natural gas supply market (from a monopoly to free entry) had little effect on market competition and that the net benefit from deregulation so far has been negative. Reason for the failure of the deregulation effort, according to the study, is the perception among consumers that the cost of searching and switching to a new supplier would be higher than the accompanying benefit. Interestingly, the study notes that this perception was incorrect and calls for a subsidy to improve the dissemination of information.

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