Chapter 4: Retail Supply
One of the points stressed in Chapter 2 is that retail firms produce two kinds of outputs: the goods and services explicitly sold and a set of distribution services that implicitly accompanies any retail exchange. In this chapter I first show the implications of this view for the characterization of retail production in the simplest possible setting (section 4.1). Furthermore, here this characterization is used to generate two special cases that underlie the main answers in the literature to the question: what is the appropriate measure of output in retailing? Section 4.2 contains a discussion of the nature of economies of scale in retailing and the implications of the previous section for the empirical evidence provided by the prior literature. This discussion leads to the conclusion that economies of scale in retailing arise mainly as a result of the existence of elements of fixed costs in the provision of distribution services. Incidentally, the Appendix to this chapter shows how a functional form fashionable in the increasing returns literature provides a suitable and rigorous basis for capturing economies of scale in the production of assortment. Modern production theory relies heavily on the duality between transformation functions and cost functions. Section 4.3 uses the dual approach to generate cost functions corresponding to the production concepts employed in section 4.1 and derives the corresponding implications for the measurement of economies of scale on the cost side. This measurement on the cost side is illustrated with the results from a recent study that confirms...
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