1989 Reports

The economic rationality of the Japanese distribution system

Flath, David

The unique features of the Japanese distribution system are usually described as backwards and economically inefficient. In academic writing on both sides of the Pacific, references to Japanese tradition, culture, history, and laws and regulations are frequent. The features of Japan's distribution system that are most often claimed to defy economic rationality include (1) the ubiquity of small retail stores and the long and convoluted channels through which goods must be shipped in order to reach them, (2) the tendency of manufacturers to impose vertical restraints on retailers and wholesalers, including resale price maintenance, assignment of exclusive territories, and insistence on exclusive dealing, and (3) unlimited acceptance by manufacturers of returns of unsold merchandise. However, each one of these three characteristics of the Japanese distribution system can be best understood or explained through economic theory. The Japanese distribution system is economically rational: The ubiquity of small stores efficiently economizes on household storage and shopping cost. The vertical restraints generally have enabled manufacturers to induce efficient behavior by retailers and wholesalers in the promotion and marketing of their products. And liberal returns policies have enabled manufacturers who must produce before learning the true demands for their products to make the best possible use of their imperfect information.