Russian Retail Trade Law and Government Barriers to Entry

Josh Wright —  26 January 2010

A new Russian retail trade law is scheduled to (at least partially) go into effect on February 1st.  The new retail trade law, with the support of the national antitrust authority and Prime Minister Putin amongst others, has three essential features: (1) limiting the operation of chains to no more than 25 percent of total sales within particular geographic regions, i.e. prohibition on internal expansion or merger, (2) restrictions on the ability of suppliers and retailers to enter into slotting arrangements and other payments for shelf space, and (3) price controls on some subset of “socially-important” goods.

Prime Minister Vladimir Putin has offered his take on the necessity of this law to protect consumers and small retail chains from dominant retailers and “stabilize” trade amongst firms in the food supply chain.  See, for example, this transcript.  Here’s an excerpt (translated):

That is why we should make major amendments in the antimonopoly legislation, and guarantee small outlets and individual traders reliable protection from giant chains abusing their dominant position… . There is another problem: traders’ relations with manufacturers, who only recently were able to dictate their terms to traders. Now, it is the other way round. Major retail chains have an impact on the market.  The most insecure situation is in food retailing, where many Russian suppliers come against major obstacles. That is why the draft law will envisage norms for balanced and mutually lucrative relations in the entire business from the farm to the counter.In particular, we should elaborate a model food supply contract to smooth out wholesale pricing, trade markups, payment deadlines, liability for noncompliance, etc-naturally, without any discriminatory terms.

Recently, I lectured in Moscow and Kiev (where Ukraine may pass a similar law), graciously hosted by the Atlas Foundation and inliberty.ru, on the likely consequences of such a law.  The lectures included discussions with academic economists, antitrust regulators (who support the law) and other government officials, retail trade associations and student groups.  I discussed the antitrust treatment of shelf space arrangements in the United States, as well as much of my own research indicating the consumer benefits that flow from allowing vigorous competition for shelf space between suppliers.

A few observations on the retail antitrust debate in Russia that I found interesting either in their own right or in comparison to the US experience.

The first is that the debate is almost exclusively focused on the exercise of retail market power rather than the possibility of upstream monopolists excluding rivals by purchasing shelf space.  In the US, both concerns are frequently discussed but most of the antitrust cases involve suppliers (Coke, McCormick, RJR, US Tobacco,  etc.).  This is especially interesting since retail chain shares in Russia are, apparently, significantly lower on average than those in the US.

A second interesting difference is how the discussion of slotting fees and payments for shelf space distribution, which are ubiquitous in various retail sectors in economies all over the world, inextricably linked to corruption and bribery.   The roots of this intuition are fairly obvious, for an American economist it was very interesting to hear the debate take place on these terms.  There is a very strong intuitive and moral sense amongst advocates of the retail trade law that payments for shelf space are immoral.  Much of my discussion was aimed at discussing the ubiquity of “competition for distribution,” the prevalent economic forces that lead to such payments in the retail sector around the world, and other forms of “competition for the field” to adopt the Demsetzian term, that are less apparent to the average consumer but still important competitive forces that lower prices and improve quality.

The Russian retail trade law is really quite expansive, and to my knowledge unprecedented, in terms of the combination of restrictions on vertical contracts, sales quotas, and price controls.  The net effect, obviously, will be harm to competition and to Russian consumers.  Some of this law goes into effect on February 1, with other provisions for major chains on July 1.  It is an excellent opportunity for empirical study of the effects of these types of restrictive trade laws and perhaps, to gather evidence that would produce support for amendments that would weaken its effects.

3 responses to Russian Retail Trade Law and Government Barriers to Entry

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