The Costs of Zoning Regulations in Retail Chains: The Case of the City Planning Act of 1968 in Japan

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 markets ("type 1 zoning"). Second, the law requires a developer to obtain permission from the local government to develop an outlet in specified markets ("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.

Keywords: zoning, entry, regulation, chain, retailing

JEL Classification: L1, L5, R3