Winning Big: Scale and Success in Retail
42 Pages Posted: 10 Sep 2020
Date Written: May 28, 2020
In this paper we use a novel natural experiment where firms were randomly allocated differently sized retail chains to study the effects of firm scale and market concentration on outcomes for both firms and consumers. Beginning in 2014, Washington State used a lottery to allocate licenses to firms in the newly legalized retail cannabis industry. This lottery generates random variation in firm size and in the level of market concentration. We also observe detailed data on all subsequent industry transactions, including prices, wholesale costs, markups, and product assortments. We find that firms that are randomly allocated more retail store licenses in the lottery ultimately earn substantially higher per store profits than single-store firms. Retailers in multi-store chains charge lower margins, offer larger product assortments, and pay lower wholesale prices. They also face higher but more elastic consumer demand. Similarly at the market level, more concentrated markets have lower average prices and markups. These results have implications for the study of markups and concentration, retail concentration and mergers, countervailing buyer power, and consumer search. We conclude that higher retail scale and a more concentrated retail sector can benefit consumers and firms alike.
Keywords: Economies of scale, retail pricing, markups, entrepreneurship, mergers, concentration, consumer search, countervailing buyer power
JEL Classification: L11, L22, L81
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