Efficiency of the Retail Industry and Inelastic Supply

Abstract

We propose a method to measure the efficiency of the retail industry. In the case of the manufacturing industry, we can define its efficiency by total factor productivity (TFP) based on the production function. Since retailers do not produce specific objects, we cannot observe their output with the exception of monetary observations such as sales or profit. TFP could be computed as in the manufacturing industry using such data, however, increased TFP does not necessarily indicate efficiency gain for retailers because it also includes the effects from the demand side. If demand increases, the TFP of retailers will increase. Therefore, we look at retailers' cost function rather than production function to study their efficiency. Assuming that the retail industry is competitive, we construct a cost model and identify the cost efficiency. In standard economic theory, duality holds for productivity and cost efficiency, though it is not clear in the present case. This paper deals with the retailers of goods with an inelastic supply function which include agricultural and marine products. We propose and apply a new empirical method to measure the retail industry efficiency of agricultural products using Japanese regional panel data of wholesale and market prices and traded quantity for a variety of vegetables from 2008 to 2014. The marginal cost efficiency was stable during this period.