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The Evolving Food Chain: Competitive Effects of Wal-Mart's Entry Into The Supermarket Industry

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  • Noel, Michael
  • Basker, Emek

Abstract

We analyze the effect of Wal-Mart's entry into the grocery market using a unique stor-level price panel data set. We use OLS and two IV specifications to estimate the effect of Wal-Mart's entry on competitors' prices of 24 grocery items across several categories. Wal-Mart's price advantage over competitors for these products averages approximately 10%. On average, competitors' response to Wal-Mart's entry is a price reduction of 1-1.2%, mostly due to smaller-scale competitors: the response of the "big three" supermarket chains (Alberson's, Safeway, and Kroger) is less than half that size. We confirm our results using a falsification exercises, in which we test for Wal-Mart's effect on prices of services that it does not provide, such as movie tickets and dry cleaning services.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt4nq8d4sm.

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Date of creation: 01 Jun 2007
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Handle: RePEc:cdl:ucsdec:qt4nq8d4sm

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Keywords: Wal-Mart; Retail Prices; Supermarkets; Price Competition;

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References

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  1. Emek Basker, 2002. "Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion," Working Papers 0215, Department of Economics, University of Missouri, revised 14 Jan 2004.
  2. Andrew W. Franklin, 2001. "The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas," Agribusiness, John Wiley & Sons, Ltd., vol. 17(1), pages 105-114.
  3. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November.
  4. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  5. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
  6. 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.
  7. Vishal P. Singh & Karsten T. Hansen & Robert C. Blattberg, 2006. "Market Entry and Consumer Behavior: An Investigation of a Wal-Mart Supercenter," Marketing Science, INFORMS, vol. 25(5), pages 457-476, September.
  8. Daniel Aaronson, 2001. "Price Pass-Through And The Minimum Wage," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 158-169, February.
  9. Frankel, D.M., 1996. "The (Retail) Price of Inequality," Papers 23-96, Tel Aviv.
  10. Thomas J. Holmes, 2008. "The Diffusion of Wal-Mart and Economies of Density," NBER Working Papers 13783, National Bureau of Economic Research, Inc.
  11. Ellickson, Paul, 2005. "Supermarkets as a Natural Oligopoly," Working Papers 05-04, Duke University, Department of Economics.
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