A New KCG Working Paper on International Trade and Retail Market Performance and Structure

In recent decades, advanced economies have experienced a sharp increase in consumer goods imports, leading to an unprecedented degree of import penetration across many consumer goods industries. A new KCG Working Paper, co-authored by Philipp Meinen, Ph.D. (Deutsche Bundesbank and Aarhus University) and Prof. Horst Raff, Ph.D. (KCG and Kiel University), aims to determine whether this growth in consumer goods imports has contributed to observed changes in the performance of retailers and the structure of retail markets. The existence of such a link is suggested not only by the fact that most of these imports pass through the retail sector, but also that retailers themselves have played an active part in the rapid expansion of trade in consumer goods.

The authors construct a model to feature heterogeneous retailers that endogenously decide whether to import and whether to operate as chains. This model guides their empirical analysis in the paper. The main economic mechanism explored in the analysis builds on economies of scale in importing, which imply that only big retailers and retail chains can afford direct imports so that they benefit more from trade cost reductions than small retailers. Danish microdata for the period 1999-2008 are used to test the model’s predictions. In doing so, the authors consider model-implied adjustments at the firm level and local retail market level.

The analysis shows that importing retailers are larger, more profitable, and have a higher propensity to have multiple shops than domestically sourcing firms. While this is partly due to self-selection, the authors also present evidence for improved performance caused by firms’ importing activities. Moreover, retail imports are found to be associated with a higher exit probability of small retailers and greater local retail market concentration. Overall, the empirical analysis provides support for the model’s predictions. Thus, the authors argue that the observed adjustments may imply additional gains from trade absent from models lacking a distribution sector.

The working paper can be accessed here.