Productivity, Returns to Scale and Product Differentiation in the Retail Trade Industry: An empirical analysis using Japanese firm-level data

This paper examines productivity and returns to scale under the assumption of monopolistic competition using Japanese firm-level data. Although differentiating products (services) is considered important in firms' strategies and productivity growth, it has not been sufficiently investigated in previous studies. In this paper, we study this issue in two retail trade industries, department stores and supermarkets, applying the model of Melitz (2000). Our results indicate that the retail trade industries possibly follow increasing returns to scale if we consider the effects of product differentiation. In addition, product differentiation has a positive effect on firms' revenue. Thus, policy measures that promote economies of scale and product differentiation should contribute to further growth in these industries. In addition, the results indicate that the regulatory reform of the retail trade industry in 2000 made a positive contribution.