A Model of Unorganized and Organized Retailing in Emerging Economies

Abstract

In the last two decades, organized retailing has transformed the retailing landscape in emerging economies, where unorganized retailing has traditionally been dominant. In this paper, we build a theoretical model of unorganized and organized retailing in emerging economies by carefully modeling key characteristics of the retailing environment, the retailers, the consumers, and product categories. The primary insight that we obtain is that in a competitive market comprising of only unorganized retailers, the advent of organized retailing injects efficiency into the market leading to a reduction in the number of unorganized retailers. This, in turn, makes the market less competitive. Building on this basic insight, we obtain a number of counterintuitive results. For instance, (i) the presence of organized retailing may increase the prices charged by unorganized retailers; (ii) as the consumers’ transportation cost to the unorganized retailers increases, the market share of the unorganized retailing sector may increase; (iii) as the probability of bulk consumption increases and consumers prefer to purchase more from the organized retailer, prices and profits at the organized retailer may decrease; and (iv) the presence of organized retailing can lead to both consumer and social surplus being lower because consumers face higher prices at unorganized retailers and there is wastage in the economy due to bulk purchasing at organized retailers. Our model offers an explanation for certain surprising empirical observations related to retailing in emerging markets, such as why in the last few years in the Indian market the unorganized retailers who have survived the advent of organized retailing seem to be doing better. Implications from our research can provide guidance to policy makers grappling with issues related to the balanced growth of unorganized and organized retailing in emerging markets.

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“…emerging markets (Jerath, Sajeesh, and John Zhang 2016). For example, 85% of the retail industry in Brazil, Russia, India, and China is unorganized (Mangalorkar, Kuppuswamy, and Groeber 2007).…”

“…We make this assumption for the following reasons. First, as explained previously, the retail industry is unorganized in most emerging markets (Jerath, Sajeesh, and John Zhang 2016). For example, 85% of the retail industry in Brazil, Russia, India, and China is unorganized (Mangalorkar, Kuppuswamy, and Groeber 2007).…”