Abstract
Two models are developed that considers the different services provided by retail firms as an output of the retail industry besides the goods sold. The first model considers that consumers only gain utility from consuming retail goods and services and the second model considers that consumers shop for retail goods and experience a transaction cost, which is determined by the level of services. From both models a measure of retail output and value added is constructed. The models are used to answer the following question. Does the Bureau of Economic Analysis (BEA) accurately capture the value of retail services while calculating the value added of the retail sector? The models are estimated by a Generalized Method of Moments estimation technique using data for the retail industry between 1980 and 2005. The estimate of parameters from both models suggests declining market power over time and scale economies in the retail industry. The BEA measures the retail output on the basis of the gross margin which is total sales less total purchases and does not consider the value of services. We compute value added on the basis of our models. In both models, the values of retail services are included while calculating retail output. Results show that the BEA has underestimated the value added of the retail sector for all years in the study. The degree of underestimation is close in both models and it declines across time.