Efficiency of the retail industry and inelastic supply

We propose a method to measure the e ciency of the retail industry. In the case of the manufacturing industry, we can de ne its e ciency by total factor productivity (TFP) based on the production function. Since retailers do not produce speci c objects, we cannot observe their output with the exception of monetary observations such as sales or pro t. TFP could be computed as in the manufacturing industry using such data, however, increased TFP does not necessarily indicate e ciency gain for retailers because it also includes the effects from the demand side. If demand increases, the TFP of retailers will increase. Therefore, we look at retailers' cost function rather than production function to study their e ciency. Assuming that the retail industry is competitive, we construct a cost model and identify the cost e ciency. In standard economic theory, duality holds for productivity and cost e ciency, though it is not clear in the present case. This paper deals with the retailers of goods with an inelastic supply function which include agricultural and marine products. We propose and apply a new empirical method to measure the retail industry e ciency of agricultural products using Japanese regional panel data of wholesale and market prices and traded quantity for a variety of vegetables from 2008 to 2014. The marginal cost e ciency was stable during this period.