Improving Microretailer and Consumer Welfare in Developing Economies: Replenishment Strategies and Market Entries

Abstract

Problem definition: Microretailers in remote rural areas in developing countries face high replenishment costs because of poor road infrastructure and the lack of formal distribution channels. This paper investigates the effectiveness of two innovative replenishment strategies (purchasing cooperatives and nonprofit wholesalers) deployed by nongovernmental organizations to reduce microretailers’ replenishment costs and improve consumer welfare. Academic/practical relevance: The problem is relevant in practice, as travel cost has been documented as a major cost burden that leads to meager earnings for the microretailers, few retailers in the market, and high prices to the consumers (because of less competition). Analyzing how these innovative strategies alleviate the previously described problems enables us to develop practical insights as well as fill an important gap in the literature. Methodology: We adopt a stylized model that captures price competition, consumer welfare, and the market entry decision of microretailers under the replenishment strategies considered. We compare the equilibrium retailer profit, consumer welfare, and the number of retailers entering the market under these strategies. Results: We find that in a regulated market, a nonprofit wholesaler creates supply chain inefficiency, and thus can lead to a higher retail price, which benefits the retailers yet harms the consumers. However, with free market entry (unregulated market), we show that under certain market conditions, both the cooperative and the nonprofit wholesaler strategies can be Pareto improving. Yet between these two strategies, there typically exists a trade-off in both regulated and unregulated markets, that is, the cooperative strategy enhances consumer welfare, while the wholesaler strategy leads to higher retailer profits. Managerial implications: The policy maker needs to be mindful about the market conditions and the relative emphasis between the profit and market participation of microretailers and consumer welfare when choosing and implementing the purchasing cooperative and the nonprofit wholesaler strategies. The online appendix is available at https://doi.org/10.1287/msom.2017.0700 .

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