Incumbent’s Price Response to New Entry:The Case of Japanese Supermarkets
Large-scale supermarkets have rapidly expanded in Japan over the past two decades, partly because of zoning deregulations for large-scale merchants. This study examines the effect of supermarket openings on the price of national-brand products sold at local incumbents, using scanner price data with a panel structure. Detailed geographic information on store location enables us to define treatment and control groups to control for unobserved heterogeneity and temporary demand shock. The analysis reveals that stores in the treatment group lowered their prices of curry paste, bottled tea, instant noodles, and toothpaste by 0.4 to 3.1 percent more than stores in a control group in response to a large-scale supermarket opening.
The retail sector has been regarded as one of Japan’s least productive industries. In 2000, the McKinsey Global Institute issued a very influential report, which found Japan’s overall retail productivity is half of the US’s; in particular, the productivity of small-scale retail stores is only 19 percent of that in the US. The report points out that the large share of unproductive small retail shops was the main cause of overall low productivity. The report claims that this lower productivity hurt Japanese consumers through high prices.