The Diffusion of Wal-Mart and Economies of Density

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