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Selling a Cheaper Mousetrap: Wal-Marts Effect on Retail Prices

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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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File URL: http://economics.missouri.edu/working-papers/2004/wp0401_basker.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0401.

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Length: 36 pgs.
Date of creation: 20 Oct 2004
Date of revision: 16 Mar 2004
Publication status: Published in Journal of Urban Economics, 58:2 (September 2005), pp. 203-229
Handle: RePEc:umc:wpaper:0401

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Keywords: Wal-Mart; Competition; Prices; Market Size;

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References

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  1. Jerry Hausman & Ephraim Leibtag, 2009. "CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?," NBER Chapters, in: Price Index Concepts and Measurement, pages 203-231 National Bureau of Economic Research, Inc.
  2. Jeffrey Campbell, 2000. "Market Size Matters," Econometric Society World Congress 2000 Contributed Papers 1225, Econometric Society.
  3. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  4. 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.
  5. 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, MIT Press, vol. 111(4), pages 1211-36, November.
  6. Frankel, David M. & Gould, Eric, 2001. "The Retail Price of Inequality," Staff General Research Papers 11922, Iowa State University, Department of Economics.
  7. 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.
  8. Thomas J. Kane & Cecilia Rouse & Douglas Staiger, 1999. "Estimating Returns to Schooling When Schooling is Misreported," Working Papers 798, Princeton University, Department of Economics, Industrial Relations Section..
  9. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers, Stanford - Studies in Industry Economics 151, Stanford - Studies in Industry Economics.
  10. 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.
  11. 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.
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Cited by:
  1. Courtemanche, Charles & Carden, Art, 2008. "Supersizing Supercenters? The Impact of Wal-Mart Supercenters on Body Mass Index and Obesity," Working Papers 09-3, University of North Carolina at Greensboro, Department of Economics, revised 29 Jan 2009.
  2. Neumark, David & Zhang, Junfu & Ciccarella, Stephen, 2008. "The effects of Wal-Mart on local labor markets," Journal of Urban Economics, Elsevier, vol. 63(2), pages 405-430, March.
  3. Beata Javorcik & Yue Li, 2013. "Do the Biggest Aisles Serve a Brighter Future? Global Retail Chains and Their Implications for Romania," Economics Series Working Papers 637, University of Oxford, Department of Economics.
  4. 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.
  5. Rosario Rivero & Rodrigo Vergara, 2006. "Do Large Retailers Affect Employment? Evidence from an Emerging Economy," Documentos de Trabajo 307, Instituto de Economia. Pontificia Universidad Católica de Chile..
  6. Glaeser, Edward L. & Rosenthal, Stuart S. & Strange, William C., 2010. "Urban economics and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 67(1), pages 1-14, January.
  7. 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.
  8. Iacovone, Leonardo & Javorcik, Beata & Keller, Wolfgang & Tybout, James R, 2011. "Supplier Responses to Wal-Mart's Invasion in Mexico," CEPR Discussion Papers 8540, C.E.P.R. Discussion Papers.
  9. Charles J. Courtemanche & Art Carden, 2011. "Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices," NBER Working Papers 17220, National Bureau of Economic Research, Inc.
  10. Tarun Sabarwal & Randal Watson, 2010. "Large stores and contracting for mall locations," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201007, University of Kansas, Department of Economics, revised Oct 2010.
  11. 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 urn:nbn:nl:ui:12-306411, Tilburg University.
  12. Loreto Lira & Rosario Rivero & Rodrigo Vergara, 2005. "Entry and Prices: Evidence from the Chilean Supermarket Industry," Documentos de Trabajo 299, Instituto de Economia. Pontificia Universidad Católica de Chile..

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