The Economics of Retailing Formats: Competition Versus Bargaining

Abstract

We set up a merger game between retailing stores to study the incentives of independent stores to form a big store when some consumers have preferences for one‐stop shopping. Such one‐stop shopping creates complementarity between products, leading in turn to lower prices after a big store is formed but may also lead to an improvement in the bargaining position vis‐à‐vis producers through the creation of an inside option that small stores do not have. We find that big stores will not be formed when the stores' ex ante bargaining power vis‐à‐vis producers is high. Otherwise, an asymmetric situation occurs with only one big store created when one‐stop shoppers are abundant.

Price promotions as a threat to brands

“…Since in our model retailers replace branded high‐quality products with lower‐quality variants in the promoted category when the extent of consumer one‐stop shopping is sufficiently large, our model provides a possible explanation for the widely observed long‐term growth of private labels 7 . This is consistent with an increasing consumer preference for one‐stop shopping, as claimed by some authors and policy reports (see, e.g., Baye et al, 2018; Johansen & Nilssen, 2016, and the references therein). Also, again following the main thrust of our model and argument, an increase in retail competition reduces the bargaining power of brand manufacturers, as they can then no longer bank on their superior quality or investment in brand value.…”

Buyer power, product assortment and asymmetric retail formats

“…The present paper contributes to the literature that studies the equilibrium determination of retail formats. Two of the latest contributions into this direction are Johansen and Nilssen (2016) and Rhodes and Zhou (2019). Although their approach is very different from ours (they both rely on consumers' preference for one-stop shopping), they also emphasize the possibility than, in equilibrium, firms with different product assortment coexist in the market.…”

“…They show that when search costs are sufficiently low, the equilibrium market structure is asymmetric, with one multiproduct firm and two single product firms. On the other hand, Johansen and Nilssen (2016) also study retailers' incentives to merge in the presence of consumers with preferences for one-stop shopping, which creates complementarities between products in their setting and leads to lower prices after a big retailer is formed but may also lead to improve its bargaining position with respect to producers. The authors find that big stores are not formed when the retailers' ex ante bargaining power is already high.…”

“…Nevertheless, and somewhat puzzlingly, in most retail markets large players like Wal-Mart or Amazon still coexist with many smaller retailers whose product ranges are much narrower". 3 In this paper, we want to provide a theoretical explanation for the observed successful coexistence of different retail formats, which does not rely either on consumers' preferences for one-stop shopping as for example in Johansen and Nilssen (2016) and Rhodes and Zhou (2019), or on assortment costs, as in Dukes et al (2009), and it is not a consequence either of the existence of upstream market power, like in Avenel and Caprice (2006). In our framework, the existence of different retail formats in equilibrium arises from the retailers' strategic incentives to reduce assortment, as a way to shape their interaction with suppliers.…”

Development Prospects of Industrial Economics Based on Mobile Information Systems

“…Few people will voluntarily leave in order to find a more satisfying job, and the vacancy rate will drop. In the same way, if there are many job vacancies, the unemployed will have more opportunities to find a job [24]. And new job opportunities will increase.…”