One one occasion, a student confronted my statement that market competition does not necessarily means the weak will have to face the strong in one battlefield. This student used the traditional vs. super/hypermarket as the evidence. To be honest, although I thought his statement (as well as others who shared this view) was still debatable, I could not provide any scientific evidence to refute his argument.
But a recent study of our colleagues at SMERU Research Institute now provides the empirical evidence. Their study shows that although it is true that sellers in traditional market has been loosing profits, it can not be attributed to direct competition with modern super/hypermarkets. The report is not yet available online (thanks to Dr. Sudarno Sumarto for letting me quote and discuss their work). But it has been quoted by a local news magazine.
They interviewed fresh food sellers in traditional markets in Greater Jakarta and Bandung area. The sample was then divided into two groups:
- Treatment group consists of traditional markets opened between 2003-2006 which are located within 5 km from a modern market.
- Control group consists of markets located in the same districts with that in the control group where no modern market exists within 5-km radius, but according to the regional site plan, there will be a super/hypermarket opening nearby in 2007. This last criteria is important to isolate the placement effect (the fact that a modern market is opening soon means that the location is equally attractive to modern markets).
The difference-in-difference result (see below) showed that from 2003-2006, sellers in both group are losing profits. Interestingly, those in the control group (who faced no direct competition with modern markets) experienced bigger decline in percentage term. However, the difference is statistically not different from zero (but still provides no evidence that the modern markets harmed the traditional ones). The bottom row shows that in terms of earning, the control group experienced bigger decline. This may suggest that to cope with declining profits, traditional sellers tend to maximize sales rather than profit. Still, the difference is not statistically significant.
To put it in another words, this study shows that with or without modern markets, traditional markets are declining. If financially strong modern markets are not the main culprit, then what are? According to the qualitative part of the study, many sellers view street vendors (those selling similar products outside the marketplace) as more of the problem, as well as bad management.
Before we either believe or bash this study, there are some caveats needs to be taken into account:
- First, the question of external validity: can the sample represent the population? (SMERU has acknowledged this in their study).
- Second, as our friend Arya Gaduh pointed, although they had tried to correct the placement-endogeneity bias by only considering locations where a modern market is opening, the problem may still exist. The decision to open in 2007, not earlier, may perhaps reflect location preference.
- Third, our co-blogger Sjamsu raised the issue of selection bias. Could it be that those who were interviewed only represents the 'winner,' while the 'losers' have already exit the business?
- Fourth, the study was limited to fresh-food sellers. Sjamsu also referred me to a study conducted by a consulting firm that fresh food sellers are still the winner as they still have a comparative advantage: freshness. They start selling early in the morning (when modern markets are still closed). And, in the urban/suburban areas, even the most of the mid-high income still buy fresh food from the traditional markets (or ask their pembantu to do that). So perhaps the result was skewed towards the 'winners.'
Addendum. As presented, the numbers in parentheses from the table above are standard deviations calculated from the sample. The authors did not present the standard errors for the mean values and the DiD coefficients. However, in the appendix section of the report, the authors presented the standard error and t-statistics for the DiD coefficients. The t-statistics are 0.76 (changes in profit) and -0.32 (changes in earnings). So statistically speaking the DiD coefficients are not different from zero. The authors estimated several models, adding some controls in the regressions. The coefficients changed slightly, but the results are consistently not significant.