The Contribution of Quality and Product Variety to Retail Growth in Japan

This paper examines the contribution of service quality to service sector output in Japan taking retail services as an example. Specifically, it examines how much of the variation in retail sales across retail firms is due to differences in the quality of services, including the product variety offered, and how the variation in real output of the retail sector would change if it were deflated by price indices incorporating differences in quality instead of conventional price indices. We address the methodological difficulties in quantitatively evaluating service quality by using a massive dataset of barcode-level purchase records providing detailed information about purchases at individual retail firms, constructing a structural model of consumer demand for the real output of each retail firm, and introducing a benchmark product to normalize the quality parameters. This approach enables us to assess the contribution of service quality independently from product quality. Our results show that 57% of the variation in retail firms’ sales is attributable to differences in firm-level service quality and 26% to differences in product group variety. Estimates based on the conventional price index understate the real output of large firms by a quarter relative to small firms. JEL Classification Code: L11, L13, L81