Are Japan's Wholesale and Retail Prices Higher than Those in the United States? Estimation of margin rates using microdata from the Census of Commerce

Author Name NOMURA Koji (Faculty Fellow, RIETI) / MIYAGAWA Kozo (Rissho University)
Creation Date/NO. March 2017 17-J-026
Research Project International Price Competitiveness and Productivity Gaps
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Japan's wholesale and retail industries are largely sheltered from international competition and offer an important opportunity for improving the productivity performance of the Japanese economy. Jorgenson, Nomura and Samuels (2016) estimate that the Japanese wholesale and retail industry was 33% less efficient than its U.S. counterpart, and that it was the largest contributor to the negative total factor productivity (TFP) gap between Japan and the United States in 2005. This productivity gap is mainly driven by higher margin rates and margin prices in Japan. Margin rates capture the cost share of margin in the purchaser's price, while margin prices reflect the prices per unit of wholesale and retail services.

This motivates our study of product-level differences in wholesale and retail margin rates and prices. Using microdata from Japan's Census of Commerce (Ministry of Economy, Trade and Industry), which cover 1997, 2002, 2007, and 2014, we estimate margin rates in Japan. An improvement in comparison to existing approaches is that we account for transactions within the margin sector (multiple rounds of margin activity), the differences in margin rates between domestically produced and imported goods, the type of transaction (e.g., cash sales, electronic money, and so on), and sales format (e.g., over-the-counter sales, internet sales, vending machine sales, and so on). We combine these with data produced by the Bureau of Economic Analysis in the United States, in order to construct price level indexes (PLI) for about 200 types of wholesale and retail services.

The margin PLIs provide more appropriate measures than the relative margin rates to evaluate the efficiency of the wholesale and retail industry. This is because the margin PLIs that we construct are able to separate the quantity of margin services from the margin rate on the product being sold. Our estimates show that Japan's wholesale margin rates of agriculture products are not significantly higher than those in the United States. However, our estimates of the margin PLIs indicate that Japan's wholesale prices of agriculture products are about three times higher. Thus, our framework highlights that comparing margin rates on their own obscures important differences in the price and quantity of margin services. At the aggregate level, our estimates reveal that Japan's wholesale margin price is 23% higher, but show that retail margin prices are similar. It is worth noting that we do not fully consider differences in the quality of service between Japan and the United States. Bearing in mind these caveats, our analysis illustrates that the wholesale services of foods, agriculture products, chemical products, and paper and paper products explain about 90% of the inferiority in price competitiveness of Japan's wholesale industry.