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The Diffusion of Wal-Mart and Economies of Density

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  • Thomas J. Holmes

    ()
    (Department of Economics University of Minnesota)

Abstract

The Diffusion of Wal-Mart and Economies of Density Thomas J. Holmes A retailer can often achieve cost savings by locating its stores close together. A dense networks of nearby stores facilities the logistics of deliveries and facilitates the sharing of infrastructure such as distribution centers. This paper estimates the magnitude of density economies for Wal-Mart. I draw inferences about the cost structure that Wal-Mart faces by examining its revealed preferences in its site-selection decisions. The idea underlying my approach is that alternative sites vary in quality. If economies of density were not important, Wal-Mart would go to the highest quality sites first and work its way down over time. The highest quality sites wouldn't necessarily be bunched together, so initial Wal-Mart stores would be scattered in different places. But when economies of density matter, Wal-Mart would chose lower quality sites that are closer to its existing network, keeping the stores bunched together, putting off the higher quality sites until later when it can expand out to them. Wal-Mart pursued the latter strategy

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 15.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:15

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Keywords: density economies; Wal-Mart;

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  1. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
  2. Holmes, Thomas J, 2001. "Bar Codes Lead to Frequent Deliveries and Superstores," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 708-25, Winter.
  3. Mark J. Roberts, 1986. "Economies of Density and Size in the Production and Delivery of Electric Power," Land Economics, University of Wisconsin Press, vol. 62(4), pages 378-387.
  4. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
  5. Katherine Ho, 2005. "Insurer-Provider Networks in the Medical Care Market," NBER Working Papers 11822, National Bureau of Economic Research, Inc.
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