Regulations that prevent new retail outlets being set up have a series of damaging consequences, including reducing local employment and investment and raising prices for consumers. That is the central finding of research by Fabiano Schivardi and Eliana Viviano, published in the March 2011 issue of the Economic Journal.
Comparing parts of Italy with different approaches to the establishment of new medium to large retail stores, they find that incumbent firms in places with more stringent regulations have higher profits and lower productivity than those in places with less stringent regulations. What''s more, in places with greater barriers to entry, retail prices of food and beverages are higher, investment in information and communication technologies (ICT) is lower and employment is reduced.
The researchers conclude that entry barriers produce one category of winners and many losers. The winners are incumbent retailers, 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.
Retail trade employs around 10% of the labour force in all industrialised economies. The sector has undergone a dramatic structural change over the last two or three decades, due to the progressive increase in the market share of large outlets 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 been subject to substantial regulation in all European countries, often in the form of entry restrictions for large outlets. But such regulation can have damaging economic consequences: many argue that anti-competitive regulation is the main cause of the large difference in productivity growth in the service sector between Europe and the United States in recent years.
The case of Italy offers interesting insights. The Italian retail sector, which has a prevalence of traditional small stores, underwent a major regulatory change in 1998. A central feature of the reform was that it delegated the regulation of entry of medium to 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 on the expansion of medium to large stores.
This policy setting makes it possible to compare the retail sector''s performance across provinces with different degrees of entry restrictions. The researchers'' measure of entry barriers is 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.
The study compares retail trade firms'' performance at the local level before and after 2000, the year in which local regulations came into effect. The results indicate that entry barriers play a substantial role.
According to the estimates, large stores in the area at the 75th percentile of the barrier distribution (a region with relatively tough regulations) 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 the other way of about 3%.
The study also finds that stringent regulation depresses investments in ICT, curtails employment and increases labour costs in large stores. Finally, consistent with higher margins and lower 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.
These results are robust with respect to a large number of controls. In particular, to exclude the possibility that regulation itself is determined by the local structure of the retail sector, the researchers use political variables to analyse the variability of barriers across local markets. Specifically, they exploit the positive relationship between their barrier indicator and the local share of votes of right-wing parties (traditionally supportive of the interest of small retailers) in general elections. They find that the effects become even stronger under this specification.
The implications of the analysis are clear-cut. Entry barriers 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.
Of course, economic efficiency needs not to be the only determinants of entry regulation. For example, urban planning considerations might also play a role. Still, in regulating the sector, policy-makers should be aware that restricting entry leads to substantial efficiency costs.
''Entry Barriers in Retail Trade'' by Fabiano Schivardi and Eliana Viviano is published in the March 2011 issue of the Economic Journal.