Economics of emerging retail formats: Wal-Mart, wages and service competition

Date of Completion

January 2007


Economics, Commerce-Business|Economics, Labor




This study presents three essays on the evolving competitive environment characterizing the modern retailing industry: (1) the impact of the scope of supermarket services on food prices and demand; (2) the impact of Wal-Mart on retail wages and workers; and (3) the expansion strategy of Wal-Mart. ^ The first essay develops a structural, two-stage model of retail competition in which supermarkets compete in in-store services in the first stage and set prices monopolistically in the second. Using fluid milk as a case study, the estimated model provides empirical evidence that differentiation through services results in an increase in food prices derived from an increase in both market power and costs. Results further show that market power increases are due more to non-food related services than to food related services while supermarkets' marginal costs increases are mainly due to food services. Results also show that expanded supermarket services entice consumers with lower price sensitivity for milk. ^ The second essay uses a dominant firm model to measure the monopsony power of Wal-Mart in local retail labor markets using a cross-section of contiguous U.S. counties. Empirical results show that Wal-Mart wages are on average 2.75% lower than the competitive benchmark, generating $1.27 billion in total welfare losses to retail workers across the U.S. The relatively small estimated deadweight losses arising from Wal-Mart's non-competitive behavior raises questions regarding policy measures restricting its expansion in comparison to potential consumers' benefits from the company's lower prices and to the large volume of Wal-Mart sales. ^ The third essay investigates the expansion of Wal-Mart by via three: entry in a county, expansion across- and within-counties, and store format differentiation strategies. Empirical results show that Wal-Mart is found to expand in counties with low population density, large income inequalities, high unemployment rates, proximity of other Wal-Mart stores, and a small number of large-scale retailers. These results can provide with instruments to correct for Wal-Mart endogenous location in studies further assessing the effects of Wal-Mart on local economies, workers and consumers. ^