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The Diffusion of Wal-Mart and Economies of Density

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  • Thomas J. Holmes

Abstract

The roll-out of Wal-Mart store openings followed a pattern that radiated from the center out with Wal-Mart maintaining high store density and a contiguous store network all along the way. This paper estimates the benefits of such a strategy to Wal-Mart, focusing on the savings in distribution costs afforded by a dense network of stores. The paper takes a revealed preference approach, inferring the magnitude of density economies by the extent of sales cannibalization from closely-packed stores that Wal-Mart is willing to sustain to achieve density economies. The model is dynamic with rich geographic detail on the locations of stores and distribution centers. Given the enormous number of possible combinations of store-opening sequences, it is difficult to directly solve Wal-Mart's problem, making conventional approaches infeasible. The moment inequality approach is used instead and it works well. The estimates show the benefits to Wal-Mart of high store density are substantial and likely extend significantly beyond savings in trucking costs.

Suggested Citation

  • Thomas J. Holmes, 2008. "The Diffusion of Wal-Mart and Economies of Density," NBER Working Papers 13783, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13783
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    References listed on IDEAS

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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, September.
    2. Holmes, Thomas J, 2001. "Bar Codes Lead to Frequent Deliveries and Superstores," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 708-725, 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. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, vol. 99(1), pages 393-430, March.
    5. 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.
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    Cited by:

    1. 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.
    2. Maican, Florin & Orth, Matilda, 2008. "Productivity Dynamics and the Role of “Big-Box” Entrants in Retailing," Working Papers in Economics 328, University of Gothenburg, Department of Economics.
    3. Aguirregabiria, Victor & Mira, Pedro, 2010. "Dynamic discrete choice structural models: A survey," Journal of Econometrics, Elsevier, vol. 156(1), pages 38-67, May.
    4. Gita Gopinath & Pierre-Olivier Gourinchas & Chang-Tai Hsieh & Nicholas Li, 2009. "Estimating the border effect: some new evidence," Working Papers 09-10, Federal Reserve Bank of Boston.
    5. Haltiwanger, John & Jarmin, Ron & Krizan, C.J., 2010. "Mom-and-Pop meet Big-Box: Complements or substitutes?," Journal of Urban Economics, Elsevier, vol. 67(1), pages 116-134, January.
    6. Courtemanche, Charles & Carden, Art, 2011. "Supersizing supercenters? The impact of Walmart Supercenters on body mass index and obesity," Journal of Urban Economics, Elsevier, vol. 69(2), pages 165-181, March.
    7. Martens, Bobby J. & Dooley, Frank J. & Florax, Raymond J.G.M., 2010. "A Spatial Analysis of the Effect of Entry by Supercenter and Warehouse Club Retailers on Grocery Sales," Journal of Food Distribution Research, Food Distribution Research Society, vol. 41(2), July.
    8. Thomas J. Holmes & Sanghoon Lee, 2012. "Economies of Density versus Natural Advantage: Crop Choice on the Back Forty," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 1-19, February.
    9. Erzo G. J. Luttmer, 2011. "On the Mechanics of Firm Growth," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1042-1068.
    10. Redding, Stephen J., 2009. "Economic Geography: a Review of the Theoretical and Empirical Literature," CEPR Discussion Papers 7126, C.E.P.R. Discussion Papers.
    11. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, September.
    12. repec:hrv:faseco:30703875 is not listed on IDEAS
    13. Stijn Ferrari & Frank Verboven & Hans Degryse, 2010. "Investment and Usage of New Technologies: Evidence from a Shared ATM Network," American Economic Review, American Economic Association, vol. 100(3), pages 1046-1079, June.
    14. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
    15. Alessandro Bonanno, 2010. "An empirical investigation of Wal-Mart's expansion into food retailing," Agribusiness, John Wiley & Sons, Ltd., vol. 26(2), pages 220-242.
    16. Emek Basker, 2007. "When Good Instruments Go Bad," Working Papers 0706, Department of Economics, University of Missouri.
    17. O'Gorman, Catherine & Smith, Howard, 2008. "Efficiency Gain from Ownership Deregulation: Estimates for the Radio Industry," CEPR Discussion Papers 6699, C.E.P.R. Discussion Papers.
    18. Victor Aguirregabiria & Gustavo Vicentini, 2006. "Dynamic Spatial Competition Between Multi-Store Firms," Working Papers tecipa-253, University of Toronto, Department of Economics.
    19. Courtemanche, Charles & Carden, Art, 2009. "The skinny on big box retailing: Wal-Mart, warehouse clubs, and obesity," MPRA Paper 25326, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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