Does Keeping Large Retailers Out Help Small Retailers?

January 22, 2014

Restricting the entry of large stores to protect independent retailers actually harms those small retailers, according to a study by Raffaella Sadun, an assistant professor of business administration at Harvard Business School.

Many Organization for Economic Cooperation and Development countries have adopted "planning regulations" -- policies that aim to keep large, big-box retailers out of their markets. The main motivation behind these laws is to protect small retailers from the competition of those larger stores.

But do they work? Sadun studied a set of planning regulations introduced in the United Kingdom in 1996. The regulations raised barriers to entry on stores that were not already included in local development plans as well as on retail developments above 2,500 square meters in size. What resulted?

  • Independent retailers were actually harmed by the 1996 regulation. The law did not just keep big-box retailers out, but it encouraged those large retailers to invest in smaller, more centrally located formats. This meant that those retailers were able to compete even more directly with the smaller stores that the law was trying to protect.
  • There was a decline in the number of planning grants that were issued between 1993 and 2003. Moreover, a one standard deviation decrease in the number of planning grants issued actually coincided with a 1.7 percent increase in employment growth of the small chain formats that were opened by the large chain retailers, but a 0.48 percent decrease in employment growth of the small, independent retailers.
  • Between 1998 and 2004, an estimated 6 percent to 26 percent of the decline in employment experienced by the small retailers was due to the drop in planning grants due to the law.

While the UK regulations increased the cost of opening large retail stores, those retailers simply changed their strategies and found ways to compete even more directly with the protected, independent stores.

Source: Raffaella Sadun, "Does Planning Regulation Protect Independent Retailers?" National Bureau of Economic Research, January 2014.

 

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