Winning Big: Scale and Success in Retail

Hollenbeck, Brett and Giroldo, Renato (2020): Winning Big: Scale and Success in Retail.

Abstract

In this paper we study a novel setting where firms were randomly allocated differently sized retail chains in a new and rapidly growing industry. 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 much 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. We conclude that higher retail scale and a more concentrated retail sector can benefit consumers and firms alike.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economies of scale, retail pricing, markups, entrepreneurship
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure; L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade ; e-Commerce

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