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Winning Big: Scale and Success in Retail Entrepreneurship

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  • Hollenbeck, Brett
  • Giroldo, Renato

Abstract

In this paper we study a novel setting where firms were randomly allocated differently sized retail chains in a new and rapidly growing industry. Beginning in 2014, Washington State used a lottery to allocate licenses to firms in the newly legalized retail cannabis industry. This lottery generates random variation in firm size and in the level of market concentration. We also observe detailed data on all subsequent industry transactions, including prices, wholesale costs, markups, and product assortments. We find that firms that are randomly allocated more retail store licenses in the lottery ultimately earn much higher per store profits than single-store firms. Retailers in multi-store chains charge lower margins, offer larger product assortments, and pay lower wholesale prices. They also face higher but more elastic consumer demand. Similarly at the market level, more concentrated markets have lower average prices and markups. We conclude that higher retail scale and a more concentrated retail sector can benefit consumers and firms alike.

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  • Hollenbeck, Brett & Giroldo, Renato, 2020. "Winning Big: Scale and Success in Retail Entrepreneurship," MPRA Paper 100766, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:100766
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    Cited by:

    1. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2024. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," CRC TR 224 Discussion Paper Series crctr224_2024_501, University of Bonn and University of Mannheim, Germany.
    2. Sylvia Hristakeva, 2022. "Determinants of Channel Profitability: Retailers’ Control over Product Selections as Contracting Leverage," Marketing Science, INFORMS, vol. 41(2), pages 315-335, March.
    3. Giroldo, Renato & Hollenbeck, Brett, 2021. "Concentration, Retail Markups, and Countervailing Power: Evidence from Retail Lotteries," MPRA Paper 109039, University Library of Munich, Germany.
    4. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2023. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," Rationality and Competition Discussion Paper Series 487, CRC TRR 190 Rationality and Competition.
    5. Øyvind Thomassen & Howard Smith & Stephan Seiler & Pasquale Schiraldi, 2017. "Multi-category Competition and Market Power: A Model of Supermarket Pricing," American Economic Review, American Economic Association, vol. 107(8), pages 2308-2351, August.
    6. Brett Hollenbeck & Kosuke Uetake, 2021. "Taxation and market power in the legal marijuana industry," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 559-595, September.

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    More about this item

    Keywords

    Economies of scale; retail pricing; markups; entrepreneurship;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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