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Value of Retailing Services June 12, 2007

Posted by jyu in Qualifying.
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–Manufacturers sell a certain good for which consumers have demands

–Retailers sell services in addition to goods.  Retailers sell to final consumers what someone else has made through phsical store or internet.  Retailers exist and operate profitably because they perform a service which their customers value.  The are then compensated through margins by marking-up goods they sell.

According to Bliss (1988), the retailer incurs overhead costs which must be recovered by markups.  The consumers also incur overhead costs in coming to the shop and would incur additional costs if they have to visit more than one shop.  An obvious condition of equilibrium is that all shops should offer equally good vlaue for moeny as measured by the indirect utility function common to all consumers.  A shop offering less good value than others would lose customer, while a shop offering an excess of value could raise some prices and increase its profit.  This is the reason why retailers provide various services along with the good that they sell to consumers.

Services provided by retailers include:

  • advertising
  • labor staffing
  • one-stop shopping
  • assortment
  • convenient location…

Most of these services improve information or cut down on search and transaction costs. Ratchford and Stoops (1992) illustrated that marginal contribution of retail advertising and labor as the marginal reduction in the consumer’s acquisition costs.  They key concept is that retail services will be traded off for increased margins up to the point where marginal saving for consumers is equal to marginal increase in the retailer’s margin.

Although manufacturer might also provide advertising to influence consumer preference, the advertising primarily serves to emphasize product differentiation and hance mostly increases the full price paid by consumers.

Retail Formats:

  • Bentancourt and Gautschi (1990): provide a formal analysis of the retail assortment problem by formulating the retail demand as a function of the underlying demand for various activities involved in the household production.  Based on this view, a household pursing a disaggregated consumption activity like dinner on Christmas eve may choose to shop at a specialty store with a greater depth of assortment than at a convenience store.  Thus, different retail formats exist to satisfy varying demand of the underlying consumption activities
  • Messinger and Narasimhan (1997): develop a model to explain the growth of one-stop shopping and suggests that greater prevalence of one-stop shoping has been a response to growing demand for time-saving convenience
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