Monday, 9 May 2011

Entry restrictions are bad for business ......

if you are a consumer, but not if you are an incumbent firm.

As an example we can look at the situation in Europe. Retail trade is regulated in all European economies. A recent column at studies a 1998 Italian reform that delegated retail regulation to local authorities and therefore generated regional variation in barriers to entry. It shows that entry restrictions favour incumbent shops and reduce productivity and employment in the sector. Consumers pay for all this through higher prices.

Due to things like urban planning considerations and the desire to protect "small, traditional stores", retail trade has being subject to substantial regulation in all countries in Europe. An often seen form of regulation is entry restrictions for large outlets. You see the same thing in the U.S. with restrictions on the location of stores like Walmart and in New Zealand when RMA considerations stopped an IKEA store from opening up in Wellington. It is important to understand the economic consequences of such regulation.

In their column, The costs of entry restrictions in retail trade, Fabiano Schivardi and Eliana Viviano write,
[...] a small but growing literature has analysed the effects of various forms of regulation on sectoral performance in some EU countries. Bertrand and Kramarz (2002) for France, Viviano (2008) for Italy, and Sadun (2008) for the UK have studied the effects of barriers to entry to large outlets on sectoral employement at the local level. They all find that entry barriers depress employment. The evidence is more scant on other measures of sectoral performance. Griffith and Harmgart (2008), again for the UK, find that entry restrictions reduce the number of large supermarkets and that restrictive planning regimes are associated with higher food prices. Schaumans and Verboven (2008) study the highly regulated pharmacies in Belgium, where regulation is usually justified on the necessity to ensure availability of pharmacies over the whole national territory. They conclude:
Our overall conclusions are that an appropriate reduction in the regulated markups, combined with a removal or relaxation of the geographic entry restrictions, can lead to a large shift in rents to consumers (taxpayers) without the risk of reducing the availability of supply. This strongly indicates that the current regime of high regulated markups and restricted entry protects the private interests of pharmacies rather than the public interest.
In their study Schivardi and Viviano carry out a general assessment of the effects of entry barriers for large outlets on retail performance in Italy. They explain,
The Italian retail sector, which has a prevalence of traditional small stores, underwent a major regulatory change in 1998. A central feature of this reform is that it delegates the regulation of entry of medium–large stores to local authorities. As it turns out, local authorities chose very different approaches to entry regulation. In particular, most regions established stringent ceilings to the expansion of medium-large stores. This constitutes an interesting policy setting, as we can compare the sectoral performance across provinces with different degree of entry restrictions. We used as a measure of entry barrier the ratio between the local population and the entry ceilings for medium and large stores. The higher this value, the more stringent the entry regulation.

We compared retail trade firms’ performance at the local level before and after 2000, the year in which local regulations came into effect. We found that entry barriers play a substantial role. According to our estimates, large stores in the area at the 75th percentile of the barrier distribution recorded higher margins by about 8% with respect to those in the area at the 25th percentile. The same exercise for productivity implies a difference of about 3%. We also find that a stringent regulation depresses investments in technology, curtails employment, and increases labour costs in large stores. Finally, consistently with lower margins and higher productivity, prices of goods in the “food and beverages” retail sub-sector – the segment with the greatest presence of large stores – are higher the more stringent the entry regulation.

To exclude the possibility that regulation itself is determined by the local structure of the retail sector, we used political variables to model barriers variability across local markets. Specifically, we exploit the positive relationship between the barrier indicator and the local share of votes of the right-wing parties (traditionally supportive of the interest of small retailers) in the general elections. We find that the effects become even stronger under this specification.
Schivardi and Viviano's overall conclusion,
[...] the conclusions of the literature on the effects of entry regulations in retail trade are very consistent. Although the country, method of analysis and measures of performance differ between studies, they all arrive at the same conclusions. Entry barriers and restrictive regulation produce one category of winners and many losers. The winners are incumbents, who enjoy substantially higher profits. On the other side, economic efficiency and employment is reduced and consumers are harmed through a less efficient distribution system and higher prices. These results fit with the idea that anti-competitive regulation is the main cause of the large US–Europe difference in productivity growth in the service sector in the recent years. Moreover, differences in productivity growth between the US and Europe have been greatest in retail trade, which alone explains a large fraction of the total gap.
So the higher the entry restrictions, the higher are incumbent profits and prices, the lower are economic efficiency and employment and the less is productivity. All of this means welfare of consumers is lower than it otherwise would be.

No comments: