Academic journal article Journal of Economics and Economic Education Research

Retail Industry Structure: 1977-1992

Academic journal article Journal of Economics and Economic Education Research

Retail Industry Structure: 1977-1992

Article excerpt

INTRODUCTION

Coverage of imperfectly competitive output markets in principles of economics texts has traditionally treated retail markets as monopolistically competitive, while confining the discussion of structure measures and oligopoly models to manufacturing. Colander (1995) and Parkin (1998) exemplify authors who offer only manufacturing examples to illustrate structure measures. Both provide Hirschman-Herfindahl index measures for selected manufacturing industries; Colander also includes four-firm concentration ratios. Authors of leading texts such as McConnell and Brue (1999), Boyes and Melvin (1999), and Hall and Lieberman (1998) present retail industries that contain large national firms as examples of monopolistically competitive industries. Specifically, McConnell and Brue cite dining out, Boyes and Melvin consider retail clothing stores including The Gap, The Limited and Limited Express, while Hall and Lieberman identify food markets among the industries that fit the structural conditions of monopolistic competition. The implicit assumption of these and most other economics texts is that retailing industries are too atomistic for coordinated pricing to occur and that relevant pricing models for retailing should posit independent behavior.

While a dichotomy that describes retailing as monopolistic competition and manufacturing as oligopoly was appropriate for most of the last forty years, recent changes have made it more difficult to sell students on the notion that retail markets are the province of small independent firms. Students who routinely shop in the Gap and the Limited for clothing, eat regularly at McDonalds, Burger King and Pizza Hut, and accompany their parents on weekend excursions to Home Depot find it difficult to square their perception of the retail landscape with the theoretical models being taught in economics classes. Moreover, by ignoring retail industries in our discussions of market concentration and large firm dominance, we deny students the opportunity to relate structure measures to the very markets that they find most familiar.

The purpose of this paper is to provide descriptive evidence regarding recent trends in retailing industries. By incorporating these descriptive data into textbooks and the discussion of market structure, faculty teaching economic principles can build a foundation for structure measures and the extent of large firm market domination using industries that are relevant for college students. Moreover, by demonstrating that many retail markets are highly concentrated, the data can be used as a foundation for analyzing portions of the retail sector using models of oligopoly rivalry instead of the more traditional analysis of retailing as monopolistically competitive.

DISCUSSION

Considerable empirical evidence supports the notion that retail markets are becoming more concentrated and that retailing, once dominated by local and regional players, has witnessed a gradual evolution toward national firms. Successful retail firms tend to evolve from players in local and regional markets to national chains (Miller, 1981). Research by Cotterill and Mueller (1980) provides empirical evidence of the trend for the grocery business. Cotterill and Mueller find that the market share of the twenty leading grocery chains increased from 26.9 percent in 1958 to 37 percent in 1975. Finally, Thomas Rauh, director of retail consulting for Ernst and Young, argues in a 1989 Fortune article that in the future each retail category will have no more than half a dozen and perhaps as few as two merchants accounting for as much as 60 percent of retail sales.

An examination of basic descriptive structure measures also provides support for a trend toward increasing concentration in at least some retail industries. Furthermore, several industries have reached concentration levels that would suggest a market structure that is beginning to resemble oligopoly rather than monopolistic competition. …

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