Collaborative Micro-Retailing in Developing Economies

Abstract

In many developing countries, micro-retailers in remote rural places struggle to survive due to high inventory replenishment costs caused by lack of efficient infrastructure and distribution networks. Consumers, in turn, suffer from higher prices and limited accessibility of products provided by these micro-retailers. Some of these products are necessities, including food or medical items. In some cases, micro-retailers are the only sources for consumers to obtain these products. In order to help micro-retailers and the communities they serve, NGOs have been exploring different approaches aiming to coordinate the retailers’ inventory replenishment strategy. This chapter explores two major types of collaborative strategies observed in practice, and studies their welfare implications for micro-retailers and local consumers. One strategy is based on an “open” cooperative where participating retailers jointly replenish inventories and share the travel cost incurred. The other strategy introduces an intermediary “non-profit” wholesaler who will consolidate retailers’ orders and replenish on their behalf under a low service charge. The study unveils several key trade-offs associated with these collaborative strategies. In particular, when retailers’ market entry is controlled and regulated, the cooperative strategy always leads to Pareto improvement. That is, retailers’ profit improves and consumers are also better off. However, establishing a non-profit wholesaler improves retailers’ profit at the expense of consumer welfare. This trade-off can be mitigated when retailers can freely enter the retail market. That is, the wholesaler strategy also leads to Pareto improvement under some general conditions. We further show that the cooperative strategy benefits the consumers more, while the non-profit wholesaler strategy is more effective in improving retailers’ profit and encouraging their market participation. We discuss the policy implications of these trade-offs for the deployment of collaborative replenishment for micro-retailers in practice.