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Selling a cheaper mousetrap: Wal-Mart's effect on retail prices

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  • Basker, Emek

Abstract

I quantify the price effect of a low-cost entrant on retail prices using a case-study approach. I consider the effect of Wal-Mart entry on average city-level prices of various consumer goods by exploiting variation in the timing of store entry. The analysis combines two unique data sets, one containing opening dates of all US Wal-Mart stores and the other containing average quarterly retail prices of several narrowly-defined commonly-purchased goods over the period 1982-2002. I focus on 10 specific items likely to be sold at Wal-Mart stores and analyze their price dynamics in 165 US cities before and after Wal-Mart entry. An instrumental-variables specification corrects for measurement error in Wal-Mart entry dates. I find robust price effects for several products, including shampoo, toothpaste, and laundry detergent; magnitudes vary by product and specification, but generally range from 1.5-3% in the short run and four times as much in the long-run.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 58 (2005)
Issue (Month): 2 (September)
Pages: 203-229

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Handle: RePEc:eee:juecon:v:58:y:2005:i:2:p:203-229

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Web page: http://www.elsevier.com/locate/inca/622905

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  1. Peter E. Rossi & Judith A. Chevalier & Anil K. Kashyap, 2002. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," Yale School of Management Working Papers, Yale School of Management ysm291, Yale School of Management.
  2. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  3. Frankel, D.M., 1996. "The (Retail) Price of Inequality," Papers, Tel Aviv 23-96, Tel Aviv.
  4. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series, Federal Reserve Bank of Chicago WP-03-12, Federal Reserve Bank of Chicago.
  5. Thomas J. Kane & Cecilia Elena Rouse & Douglas Staiger, 1999. "Estimating Returns to Schooling When Schooling is Misreported," NBER Working Papers 7235, National Bureau of Economic Research, Inc.
  6. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  7. Emek Basker, 2002. "Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion," Working Papers, Department of Economics, University of Missouri 0215, Department of Economics, University of Missouri, revised 14 Jan 2004.
  8. Jerry Hausman & Ephraim Leibtag, 2004. "CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?," NBER Working Papers 10712, National Bureau of Economic Research, Inc.
  9. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 851-58, August.
  10. Thomas J. Kane & Cecilia Rouse & Douglas Staiger, 1999. "Estimating Returns to Schooling When Schooling is Misreported," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 798, Princeton University, Department of Economics, Industrial Relations Section..
  11. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(3), pages 466-502, June.
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Cited by:
  1. Iacovone, Leonardo & Javorcik, Beata & Keller, Wolfgang & Tybout, James R, 2011. "Supplier Responses to Wal-Mart's Invasion in Mexico," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8540, C.E.P.R. Discussion Papers.
  2. Rosario Rivero & Rodrigo Vergara, 2006. "Do Large Retailers Affect Employment? Evidence from an Emerging Economy," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 307, Instituto de Economia. Pontificia Universidad Católica de Chile..
  3. Courtemanche, Charles & Carden, Art, 2011. "Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices," Working Papers, University of North Carolina at Greensboro, Department of Economics 11-7, University of North Carolina at Greensboro, Department of Economics.
  4. Neumark, David & Zhang, Junfu & Ciccarella, Stephen, 2008. "The effects of Wal-Mart on local labor markets," Journal of Urban Economics, Elsevier, Elsevier, vol. 63(2), pages 405-430, March.
  5. Glaeser, Edward L. & Rosenthal, Stuart S. & Strange, William C., 2010. "Urban economics and entrepreneurship," Journal of Urban Economics, Elsevier, Elsevier, vol. 67(1), pages 1-14, January.
  6. Javorcik, Beata S. & Li, Yue, 2013. "Do the biggest aisles serve a brighter future? Global retail chains and their implications for Romania," Journal of International Economics, Elsevier, Elsevier, vol. 90(2), pages 348-363.
  7. Abe, Naohito & Kawaguchi, Daiji, 2010. "Incumbent's price response to new entry: The case of Japanese supermarkets," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 196-212, June.
  8. Courtemanche, Charles & Carden, Art, 2008. "Supersizing Supercenters? The Impact of Wal-Mart Supercenters on Body Mass Index and Obesity," Working Papers, University of North Carolina at Greensboro, Department of Economics 09-3, University of North Carolina at Greensboro, Department of Economics, revised 29 Jan 2009.
  9. Igan, Deniz & Suzuki, Junichi, 2012. "The “Wal-Mart effect” in central and eastern Europe," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 194-210.
  10. Tarun Sabarwal & Randal Watson, 2010. "Large stores and contracting for mall locations," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 201007, University of Kansas, Department of Economics, revised Oct 2010.
  11. Loreto Lira & Rosario Rivero & Rodrigo Vergara, 2005. "Entry and Prices: Evidence from the Chilean Supermarket Industry," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 299, Instituto de Economia. Pontificia Universidad Católica de Chile..
  12. Gielens, K.J.P. & Gucht, L. Van de & Steenkamp, J.E.B.M. & Dekimpe, M.G., 2008. "Dancing with a giant: The effect of Wal-Mart's entry into the U.K. on the performance of European retailers," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-306411, Tilburg University.

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