Chapter 2: The Economic Function of Retail Organizations
2. The economic function of retail organizations A main theme of this work is that the economic function of any retail organization is to provide consumers with a set of distribution services together with the explicit items or services bought at retail. Section 2.1 discusses six types of distribution or transaction costs incurred by consumers and how they map into five distribution services or outputs provided by retail organizations. One implication of this discussion is that the shifting of distribution or transaction costs between retailers and consumers is an essential characteristic of retail markets. This characteristic is discussed in section 2.2, where we also explain the two formal economic concepts used to capture cost shifting: namely, distribution services as outputs of retail institutions and as fixed inputs into the purchase or consumption activities of consumers. Subsequently, section 2.3 discusses a second essential characteristic of retail markets: the bundling of these distribution services among themselves and with the items or explicit services provided at retail. I also present here basic implications of these characteristics for the specification of demand and cost functions. Characteristics such as the above two are elementary yet powerful in helping us understand the functioning of retail markets. For instance, they are sufficient to generate price dispersion and product variety with respect to distribution services in these markets, which is illustrated with a simple model of monopolistic competition in section 2.4. Furthermore, they have profound implications for competition and welfare in these markets. Some of these are derived...
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