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The Evolving Food Chain: Competitive Effects of Wal-Marts Entry into the Supermarket Industry

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Abstract

We analyze the effect of Wal-Marts entry into the grocery market using a unique store-level price panel data set. We use OLS and two IV specifications to estimate the effect of Wal-Marts entry on competitors prices of 24 grocery items across several categories. Wal-Marts price advantage over competitors for these products averages approximately 10%. On average, competitors response to Wal-Marts entry is a price reduction of 11.2%, mostly due to smaller-scale competitors: the response of the big three supermarket chains (Albertsons, Safeway, and Kroger) is less than half that size. We confirm our results using a falsification exercises, in which we test for Wal-Marts effect on prices of services that it does not provide, such as movie tickets and dry cleaning services.

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File URL: http://economics.missouri.edu/working-papers/2007/WP0712_basker.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0712.

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Length: 32 pgs.
Date of creation: 15 Jun 2007
Date of revision:
Publication status: forthcoming in Journal of Economics and Management Strategy
Handle: RePEc:umc:wpaper:0712

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

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  1. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  2. Thomas J. Holmes, 2008. "The Diffusion of Wal-Mart and Economies of Density," NBER Working Papers 13783, National Bureau of Economic Research, Inc.
  3. Frankel, D.M., 1996. "The (Retail) Price of Inequality," Papers, Tel Aviv 23-96, Tel Aviv.
  4. Emek Basker, 2003. "Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion," Labor and Demography, EconWPA 0303002, EconWPA, revised 11 Mar 2005.
  5. 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.
  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. 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, MIT Press, vol. 112(3), pages 791-825, August.
  8. 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, INFORMS, vol. 25(5), pages 457-476, September.
  9. 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.
  10. 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.
  11. Ellickson, Paul, 2005. "Supermarkets as a Natural Oligopoly," Working Papers, Duke University, Department of Economics 05-04, Duke University, Department of Economics.
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