A Model of Unorganized and Organized Retailing in Emerging Economies

44 Pages Posted: 28 Mar 2015 Last revised: 30 Sep 2015

See all articles by Kinshuk Jerath

Kinshuk Jerath

Columbia University - Columbia Business School

S. Sajeesh

University of Nebraska - Lincoln

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: August 31, 2015

Abstract

In recent decades, organized retailing has transformed the retailing landscape in emerging economies, where unorganized retailing has traditionally been dominant. In this paper, we build a theoretical model of unorganized and organized retailing in emerging economies by carefully modeling key characteristics of the retailing environment, the retailers, the consumers and product categories. The primary insight that we obtain is that in a competitive market comprising of only unorganized retailers, the advent of organized retailing injects efficiency into the market leading to a reduction in the number of unorganized retailers. This, in turn, makes the market less competitive. Building on this basic insight, we obtain a number of counter-intuitive results. For instance: (i) the presence of organized retailing may increase the prices charged by unorganized retailers, (ii) as the consumers’ transportation cost to the unorganized retailers increases, the market share of the unorganized retailing sector may increase, (iii) as the probability of bulk consumption increases and consumers prefer to purchase more from the organized retailer, prices and profits at the organized retailer may decrease, (iv) the presence of organized retailing can lead to both consumer and social surplus being lower because consumers face higher prices at unorganized retailers and there is wastage in the economy due to bulk purchasing at organized retailers. Our model offers an explanation for certain surprising empirical observations related to retailing in emerging markets, such as why in the last few years in the Indian market the unorganized retailers who have survived the advent of organized retailing seem to be doing better. Implications from our research can provide guidance to policy makers grappling with issues related to the balanced growth of unorganized and organized retailing in emerging markets.

Keywords: Unorganized and organized retailing, kirana shops, developing economies, multinational retailers, Salop model

JEL Classification: M31

Suggested Citation

Jerath, Kinshuk and Sajeesh, S. and Zhang, Z. John, A Model of Unorganized and Organized Retailing in Emerging Economies (August 31, 2015). Columbia Business School Research Paper No. 15-38. Available at SSRN: https://ssrn.com/abstract=2585601 or http://dx.doi.org/10.2139/ssrn.2585601

Kinshuk Jerath (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

S. Sajeesh

University of Nebraska - Lincoln ( email )

United States

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

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