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The costs of zoning regulations in retail chains: the case of the City Planning Act of 1968 in Japan

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Abstract

The deregulation of zoning restrictions on retailers has been at the forefront of urban policy debates in recent years. Despite the increasing attention, however, we know surprisingly little about how the zoning regulations, which impose a constraint on the supply of land for a particular use, affect retailers in urban areas. This paper examines the effect of the zoning regulations introduced in 1968 in Japan on entry of convenience-store outlets. The act specifies two zoning restrictions for retail outlets. First, the law prohibits building commercial outlets in specified residential and industrial areas (“type 1 zoning”). Second, the law requires a developer to obtain permission from the local government to develop an outlet in specified areas (“type 2 zoning”). To account for the spatial dependence in demand, costs, and zoning regulation status across markets, this paper employs an equilibrium model of store-network choice by multistore firms. Using the cross-sectional data of entry and zoning in Okinawa in 2002, the paper finds hypothetically eliminating the type 1 and type 2 regulations would increase the total number of convenience-store outlets by 10–14 and 2–3 %, respectively. Although the magnitude of the increase in store counts and sales are similar across two national chains in Okinawa, the geographical markets in which each firm increases its outlets after the deregulation differ across these two chains.

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Notes

  1. For Council for Regulatory Reform (2004), see http://www8.cao.go.jp/kisei-kaikaku/old/minutes/wg/2004/1118/item041118_02.

  2. See Ferrari and Verboven (2010) for the reference therein.

  3. A typical convenience-store outlet has a floor size of \(110\,\)m\(^{2}\) on average.

    Table 1 Two zoning regulations for developing a retail outlet with 150 square meters
    Full size table

  4. One might be concerned zoning regulations are endogenous: the appendix provides discussions on the assumption of exogeneity of zoning regulations.

  5. Building Standard Law Article 48-1.

  6. An exception available for small-size retail outlets in some prefectures in Japan is that under Article 34-8 of the City Planning Act of 1968, the development of the retail outlet is permitted if the store serves traffic drivers on major roads at roadside rest facilities under some conditions. However, in Okinawa, the prefecture government does not allow this exception; therefore, I am not going to attend to this exception.

  7. The urbanization promotion area, urbanization control area, and undelineated area account for 15, 37 and 48 % of the city planning area in Japan, respectively.

  8. The local stores are outlets from another chain, Hot Spar. In this study, I treat the Hot Spar stores as non-chain local stores for which locations store owners choose. I do so because this Hot Spar company originally started as a voluntary chain in Okinawa, and the company did not make coordinated store-location decisions.

  9. I calculate these numbers by dividing the aggregate sales for each chain in Okinawa by the number of outlets for each chain in Okinawa.

  10. http://nlftp.mlit.go.jp/ksj/jpgis/datalist/KsjTmplt-A09.html and http://nlftp.mlit.go.jp/ksj/gml/datalist/KsjTmplt-A29.html, respectively.

  11. Please refer to Nishida (2013) for a more detailed description of the variables used in this paper.

  12. I am indebted to an unknown referee for suggesting to map outlet configurations and type 1 zoning areas.

  13. Given that the grid borders are exogenously imposed by the Bureau of Census, this seemingly random location choice within a grid seems natural.

  14. I maintain this restrictive distributional assumption to identify the model parameters regarding demand and cost spillovers.

  15. I use this non-log specification for competition effects from adjacent markets because one of the necessary conditions for supermodularity of the game is not met in the specification in which the number of stores in adjacent markets affect the outlet-level revenue in logs. I tested an alternative specification in which the per-store sales decline in the total number of stores in adjacent markets. Under this specification, the game is supermodular and the parameter estimates are similar to the baseline specification of this paper.

  16. 200 times in the empirical application.

  17. Nishida (2013) contains further details on the empirical model and estimation methodology.

  18. The maximum number of outlets within the \(18\) originally type 1 zoned markets for Family Mart (LAWSON) is 1.70 (1.05), implying that the number of outlets for these 18 markets does not reach the upper bound for each chain, which is four outlets, after eliminating type 1 regulation.

    Table 5 Effect of type 1 and 2 zoning regulations on entry, sales, and costs
    Full size table

  19. Because a market is a 1 km grid, the space of 140 type 2 zoned markets and 18 type 1 zoned markets translates into about \(140\) and \( 18\,\)km\(^{2}\), respectively.

  20. Detailed results are available from the author upon request.

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Acknowledgments

An earlier version of the paper was circulated under the title “The Effect of Zoning Regulations on Entry in the Retail Industry.” I would like to thank Jeremy Fox, Ali Hortaç su, Chad Syverson, and Jean-Pierre Dubé for their detailed comments. I have also benefited from discussions with Panle Jia, Steve Levitt, Ryo Nakajima, Yeşim Orhun, Zhu Wang, Ting Zhu, and seminar participants at various places. I would also like to thank Mr. Tomita from the development division at Prefecture Office of Okinawa for sharing the details on how the prefecture government implements the regulation. I am grateful for the editor and an anonymous referee for providing valuable suggestions. I gratefully acknowledge financial support from the NET Institute (www.netinst.org), the Kauffman Foundation, and the Center of East Asian Studies. All remaining errors are my own.

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  1. The Johns Hopkins Carey Business School, 100 International Drive Baltimore, Baltimore, MD , 21202, USA

    Mitsukuni Nishida

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Appendix: Potential endogeneity of zoning regulations

Appendix: Potential endogeneity of zoning regulations

An ideal empirical model for measuring the impact of type 2 zoning regulation on entry would involve randomly assigning type 2 zoning restrictions to markets and comparing the outcomes across type 2 zoned and unzoned markets. In reality, however, conducting such social experiments is usually difficult. This paper treats type 2 zoning regulation as exogenously given, which may be problematic if zoning decisions were made based on some unobserved (to the econometrician) market-specific factors, arising either from the demand or the cost sides, which also affect the profitability of convenience-store outlets. Then one may mistakenly attribute observed outcomes, such as variations in the number of outlets across markets, to compliance costs of type 2 zoning regulation and not to systematic differences in profitability across markets. As a result, the parameter estimates can suffer from an omitted variable bias.

A piece of anecdotal evidence mitigates the concern: conversations with a local regulator’s staff has revealed that in practice, the decisions concerning where to assign type 2 zoned/unzoned area are based solely on conditions regarding population, and regulators do not consider the degree of commercial activity because such consideration would involve the difficult task of predicting the amount of commercial sales in the near future. Including in the empirical model demographics at the market level, such as the number of residents and workers, will alleviate the concern regarding an omitted variable bias.

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Nishida, M. The costs of zoning regulations in retail chains: the case of the City Planning Act of 1968 in Japan. J Regul Econ 45, 305–328 (2014). https://doi.org/10.1007/s11149-014-9247-x

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