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The Diffusion of Wal-Mart and Economies of Density

Author

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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

Suggested Citation

  • Thomas J. Holmes, 2006. "The Diffusion of Wal-Mart and Economies of Density," 2006 Meeting Papers 15, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:15
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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. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, vol. 99(1), pages 393-430, March.
    3. 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.
    4. 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.
    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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    Citations

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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

    Keywords

    density economies; Wal-Mart;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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