Indonesia | Economics

Wednesday, January 02, 2008

Restricting modern retailers: Winners and losers

From last week's Jakarta Post:
The government has issued a regulation to restrict the expansion of modern retailers including supermarkets, hypermarkets and convenience stores, which have been widely criticized for edging out traditional retailers.

Widely criticized for edging out and causing the decline of traditional retailers? Sure -- but are they really the culprit? Not according to this study.

The law apparently will focus on zoning issues. Take Jakarta, for instance. According to one of the ministry's general, in Jakarta, (I presume, new?) hypermarkets can only be opened at the outskirts. This is, indeed, a victory... for Carrefour, Giants, and all others that have managed to establish themselves in Jakarta prior to the regulation (I presume, the local government isn't going to revoke the licenses for existing hypermarkets). Unfortunately, it's bad news for the rest of us, which is very likely to include the very small retailers that the regulation was supposed to protect.

Why? Hypermarkets operate in an oligopoly market. By removing the threat of new entrants, the regulation makes the environment in which the hypermarkets operate more "stable". This has an effect of "softening" the competition amongst existing oligopolies. This softened competition allows oligopolists to increase their profit margins. Hence, I suspect that this regulation will increase the real profits of hypermarkets located in Jakarta.

And, if I am correct, guess from whose pockets will these increased profits come from? The rest of us, obviously. Since many owners of warungs -- street-side vendors -- also purchase their goods from these hypermarkets, they are likely to have to pay more that before. They would pass some of those costs to the consumers, but since goods offered by these small vendors tend to be elastic, this will reduce their overall revenue.

Herein lies the irony: A regulation that is supposed to "protect" smaller retailers (despite evidence showing that the hypermarkets are not the most important culprit in their decline) might end up accelerating their demise. On the other hand, the supposedly "big-and-evil" hypermarkets might actually gain from the whole enterprise. And consumers, which is clearly the largest constituents, will lose out from all this.

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  • If you were to make the policy, what would you suggest? Who should be better protected: the customers, the workers, the owners of traditional retailers or the owners of modern retailers? Or, are you a believer in a free market with no government's intervention?

    P.S. you may want to lose the visual verification to post comments - they're quite annoying for users.

    By Blogger Dewi Susanti, at 1/14/2008 08:54:00 am  

  • Dewi:

    On visual verification, it's helpful to fend off spammers that use bots to put comments on people's blogs.

    By Blogger Arya Gaduh, at 1/14/2008 09:03:00 am  

  • Heard from a friend of two competing companies trying to keep the price down for the consumers, with the cost at the workers' end. If consumers should be better protected from the workers, there would be no end to sweat shops, would it?

    I'll put up visual verification again when I have problems with the spammers.

    By Blogger Dewi Susanti, at 1/14/2008 09:17:00 am  

  • Dewi:
    Which one is more numerous: Poor consumers or poor workers?

    By Blogger Arya Gaduh, at 1/14/2008 09:25:00 am  

  • People aren't just numbers right?

    By Blogger Dewi Susanti, at 1/14/2008 05:42:00 pm  

  • Dewi:
    How do you suggest we evaluate a policy then? Should we put workers at a pedestal, treating them as more valuable than, say, poor farmers or unemployed people?

    Point of clarification. When you asked who should be better protected, my answer should have been "society overall". In this particular case, protecting consumers is a good proxy for protecting overall society. Different circumstances and market structure may yield different answers.

    Why? Just read the study I cited above. Modern markets weren't the traditional markets' greatest threat and problem. The traditional markets' underlying problem is internal to them. You don't fix your house's plumbing if your oven is broken.

    By Blogger Arya Gaduh, at 1/14/2008 06:19:00 pm  

  • Now that's the kind of clarification I was looking for. You didn't fully address my questions because you merely mentioning your responses without the reasoning.

    By Blogger Dewi Susanti, at 1/14/2008 09:41:00 pm  

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