Competition between organized and unorganized retailers

Abstract

Emerging markets feature the co-existence of organized retailers as supermarkets and unorganized retailers as mom-and-pop stores. Roughly, these two retail formats account half of the retail market in sales in the consumer packaged goods (CPG) industry. Supermarkets are low-density large-scale retailers with abundant shelf space while mom-and-pops are high-density small-scale retailers with limited shelf space. These characteristic differences trigger interesting trade-offs for consumers when making purchasing decisions and also results in distinct retail operations models. In the retail supply chain, supermarkets possess substantial bargaining power and they deal with CPG manufacturers via formal contracts. Meanwhile, CPG manufacturers dominate mom-and-pops and many multinational firms leverage direct distribution to influence store operations.

We study the competition between a supermarket and a cluster of mom-and-pops, which replenish a product from the same CPG manufacturer. These two retail formats compete for consumers and engage in a simultaneous retail pricing game.  We first study the one-stage retail-pricing model where the wholesale prices are exogeneous parameters. We then study a two-stage retail and wholesale pricing model where the wholesale prices are endogenously determined.  Specifically, the manufacturer sets the nanostore wholesale price to maximize his own profit as the Stackelberg game leader. Then, the supermarket and the manufacturer negotiate the supermarket wholesale price and a transfer payment term using the well-known Nash Bargaining framework. Obviously, the one-stage model is merely the retail-pricing stage of the two-stage model. In the one-stage model, we show retail competition tends to increase consumer welfare, that is, the presence of the supermarket may boost consumer utility. However, in the two-stage model, the consumers tend to worse off, i.e., the presence of the supermarket may hurt consumer utility. This is because, leveraging his influence in wholesale pricing, the manufacturer mitigates retail competition through shifting demand between these two retail formats. In both models, when the supermarket is present, we characterize an equilibrium named as “retail parabiosis” where both retail formats co-exist however the presence of the supermarket does not pose any impact to the mom-and-pops.

Biography

Jiwen Ge is an assistant professor at the Institute of Supply Chain and Analytics at Dongbei University of Finance and Economics. He did his PhD at Eindhoven University of Technology under the supervision of Professors Jan Fransoo and Dorothee Honhon. He then worked as a postdoc at Tuck School of Business under the supervision of Professor Brian Tomlin. His research centers on the emerging-market retail operations with a focus of mom-and-pop stores. His work has been published in Manufacturing and Service Operations Management.