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The Causes and Consequences of Wal-Mart’s Growth

Emek Basker∗

University of Missouri

November 2006

Abstract

Wal-Mart is the largest company in the world, yet little is known about its eco-nomic impact. This essay discusses what is known about Wal-Mart’s competitiveadvantage and its economic impact on local communities, as well as the nationaland global economy, and highlights the open questions to be addressed by futureresearch.

JEL Codes: L11, L25, L81

Keywords: Wal-Mart, Retail

∗Comments welcome to: [email protected]. I thank Saku Aura, Frank Fisher, Mark Lewis, PeterMueser, Jeff Wilder, and Pham Hoang Van for helpful conversations, and Peyton Craighill of the PewResearch Center for providing special tabulations of a Pew survey.

1 Introduction

Wal-Mart plays a large, and ever-growing, role in the U.S. economy. As of January 31, 2006,

Wal-Mart operated more than 3,200 U.S. Wal-Mart stores, and more than 500 Sam’s Club

locations. It is the largest private employer in the United States, with 1.3 million employees,

and the largest retailer in both the U.S. and the world.1 In 2004, Wal-Mart handled 6.5% of

U.S. retail sales (8.8% if automobile sales are excluded). It is the top U.S. seller of apparel,

groceries, and music, among other things, and is the top retailer in most states. Wal-Mart’s

2005 revenues exceeded that of the next five U.S. retailers combined (Schulz, 2006).2 Wal-

Mart currently accounts for 28% of Playtex’s sales, 25% of Clorox’s, 21% of Revlon’s, 13%

of Kimberly-Clark’s and 17% of Kellogg’s (Weinswig and Tang, 2006). It also accounts for

15.4% of U.S. imports of consumer goods from China. 100 million U.S. consumers shop at

Wal-Mart every week, and 84% of Americans shopped at Wal-Mart at least once during 2005

(Pew Research Center for the People and the Press, 2005).3

Wal-Mart’s growth has coincided with and amplified several existing trends in the retail

sector. Between 1963 — a year after the first Wal-Mart store opened in Rogers, Arkansas

— and 2002, the number of single-store retailers declined by 55% while the number of chain

stores nearly doubled. The number of stores belonging to large chains (with 100 or more

stores) more than tripled over this period. During these years, retailers have also tightened

their relationships with suppliers by establishing private-label brands and purchasing more

products directly from overseas producers. By increasing competitive pressures faced by

other retailers, Wal-Mart’s growth has had both direct and indirect effects on retailers’

1In addition to its domestic operations, Wal-Mart operates, or owns a majority stake in a local firm, in Ar-gentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua,Puerto Rico, and the United Kingdom. It is the largest or second-largest retailer in several of these countries.Wal-Mart recently sold its South Korean and German operations.

2The next five retailers are, in descending order of revenue, Home Depot, Kroger, Sears Holding Company(which includes Sears and Kmart), Costco, and Target. Internationally, Wal-Mart’s sales are larger than thenext three retailers combined: Carrefour (France), Home Depot (U.S.), and Metro (Germany).

3Some references to Pew Research Center for the People and the Press (2005) in the text refer to a specialtabulation from the survey, generously provided by Peyton Craighill.

investment levels, retail labor markets, retail prices, and product selection.

While many consumers value Wal-Mart’s low prices and convenience, others are con-

cerned about its economic impact. In a recent Pew Research Center survey, 19% of respon-

dents with a Wal-Mart store in their area thought that it had had a negative effect locally,

and 24% of all respondents thought that Wal-Mart was bad for the country. Perhaps not

surprisingly, non-Wal-Mart shoppers were nearly four times more likely than those who shop

at Wal-Mart regularly to think Wal-Mart had had a negative effect on their area, and more

than four times as likely to think that Wal-Mart has had a bad effect on the country (Pew

Research Center for the People and the Press, 2005). Concerns about Wal-Mart range from

its wage and benefit policies, and its impact on local businesses, traffic, and sprawl, to global

trade and Wal-Mart’s political influence.4

Some of these concerns are grounded in fact, but others are purely speculative, and

still others have been shown to be unfounded. Almost all have been distorted by partisans

on both sides of the debate. This essay aims to dispel some of the myths regarding Wal-

Mart’s economic impact, and to replace them with a systematic accounting of what is known

about Wal-Mart’s competitive advantage and its impact on the U.S. and global economy.

In the process, I highlight potential areas for future research and discuss available data

sources as well as some methodological pitfalls. The evidence suggests that Wal-Mart’s

impact on local economies is small but positive overall — it is not a “job destroyer,” and

its low prices benefit consumers, although its entry does cause some small, less efficient,

retailers to shut down. Nationally and globally, Wal-Mart’s rise has contributed to large-

scale technological improvements among competing retail chains, and its position in input

markets has potentially wider implications for global trade patterns.

4Though the identity of large retailers has changed over time, the criticisms leveled against them do not.Retail chains have been accused of “paying low wages, not contributing to their communities, taking moneyout of communities, paying fewer taxes than local merchants, and turning America into ‘a nation of clerks’ ”as far back at the 1920s (Ross, 1984, p. 247) — almost word for word the accusations that are leveled againstWal-Mart today.

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2 Wal-Mart’s Advantage

Wal-Mart’s growth has been a major contributor to the overall increase in productivity in

the retail sector, both directly and by setting an example for other retailers (McKinsey

Global Institute, 2001). Indeed, Census data show that almost all productivity growth in

the U.S. retail sector in the 1990s came from the expansion of more-productive retail chains

and the contraction and exit of less-productive retailers (?). Disclosure limitations prevent

identifying individual firms in Census studies, but Wal-Mart was the single-fastest growing

retail chain during this period.

Industry observers and academics consistently point to two major advantages Wal-Mart

possesses over its rivals: technology and scale. Across the retail sector, stores that belong

to retail chains tend to be more efficient than single-establishment retailers, and chains tend

to invest more in information technology (Doms, Jarmin, and Klimek, 2004). Wal-Mart’s

technological edge is in its logistics, distribution, and inventory control; having installed a

computer in its first distribution center in 1969, it had, by the late 1970s, connected all

Wal-Mart stores and distribution centers, along with company headquarters, to a computer

network. An early adopter of bar-code technology, Wal-Mart installed bar-code readers in all

distribution centers by the late 1980s, reducing by half the labor cost of processing shipments

(Vance and Scott, 1994). In 1990, Wal-Mart introduced Retail Link, software connecting its

stores, distribution centers, and suppliers, providing detailed inventory data “to bring our

suppliers closer to our individual stores” (Wal-Mart Stores, Inc., 1991, p. 3). Wal-Mart is

currently at the forefront of efforts to integrate Radio Frequency Identification in distribution

networks.

Economies of scale at both the store and chain levels further amplify Wal-Mart’s ad-

vantage. At the store level, the availability of bar code technology and similar technology

that reduces inventory tracking costs increases stores’ scope and scale (Holmes, 2001). After

adding pharmacies and auto services to its stores in the 1980s, Wal-Mart entered the super-

market industry in 1988 with a single Supercenter in Washington, Missouri. (Supercenters

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sell a full line of groceries in addition to general merchandise, such as clothes, housewares,

toys, and cosmetics.) Wal-Mart currently operates nearly 2,000 U.S. Supercenters, and is

the largest supermarket chain, by sales, in the U.S. The interaction of economies of scale

and scope increases Wal-Mart’s optimal chain size as its stores grow, and the stores’ optimal

size as the chain grows (Basker, Klimek, and Van, 2006). Wal-Mart’s scale has increased its

market power in input markets, and with it, its bargaining power. Size also gives Wal-Mart

an advantage in any activity that involves a fixed cost, such as contracting with foreign

suppliers, so Wal-Mart can import more than other retailers, resulting in lower costs, and

spurring further growth (Basker and Van, 2006).

Paradoxically, Wal-Mart’s tendency to open stores in relatively close proximity to one an-

other (termed “contagious diffusion” by Graff and Ashton, 1994) has provided an additional

source of advantage, by allowing the chain to exploit economies of density in distribution,

training, and advertising (Holmes, 2005). This effect appears to have overwhelmed the neg-

ative effect on profit due to self-cannibalization, and helps to explain Wal-Mart’s success

compared with Kmart and Target, which had different expansion strategies (Graff, 1998;

Holmes, 2005). Wal-Mart’s store locations in 8-year intervals from 1965 to 2005 are shown

in Figure 1. The pattern of expansion repeats itself, in an accelerated mode, for Supercenters;

Supercenter locations in 5-year intervals from 1990 to 2005 are shown in Figure 2.

3 Studying Wal-Mart’s Effects on Local Markets

Assessing Wal-Mart’s effect on various outcomes of interest (such as retail productivity,

employment and wages, prices, and spillovers to other sectors) at the national level is difficult

because the counter-factual — the state of the economy had Wal-Mart never emerged — is

unknown. Similarly, before/after analysis using only locations with Wal-Mart stores risks

attributing all the changes in the economic environment to a single cause. If some of these

changes are caused, or mitigated, by business cycles or overall economic growth, or if Wal-

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Mart anticipates some changes in the economic environment and makes its entry decisions

based on these forecasts, estimates from such analyses will be biased. Cross-sectional studies

of Wal-Mart’s impact on local markets — counties, metropolitan areas, or cities — are

subject to selection bias and risk attributing too much of the difference in outcomes to a single

cause. For example, Wal-Mart’s impact on competitors’ prices is exaggerated by studies that

ignore the chain’s preference for low-income, low-price areas (Basker and Noel, 2006). In

OLS regressions, this problem can be mitigated by including a large set of control variables

such as demographic characteristics in the model, but such a fix is subject to both data

limitations and the likely endogeneity of some control variables. Under certain assumptions,

instrumental variables or structural models that explicitly account for endogeneity may also

address this problem.

Studies that use panel data have the advantage of being able to compare markets with

and without Wal-Mart stores, or with many vs. few such stores, using difference-in-difference

estimates. But the endogeneity problem remains: neither Wal-Mart’s stores’ locations, nor

the timing of their opening, are chosen at random, so differences-in-differences estimates

of Wal-Mart’s effect are likely to suffer from positive selection bias. For example, if Wal-

Mart opens stores in thriving areas, shying away from declining ones, or opens stores during

temporary periods of growth, any positive effect Wal-Mart has on an area is likely to be

amplified, and negative effects may be obscured. Several instrumental variables approaches

have been proposed to address this problem, using information about Wal-Mart’s planning

and expansion process. Basker (2005a) uses the planning order of stores to instrument for

endogeneity in the timing of entry, but cannot account for the endogenous selection of loca-

tions. Motivated by maps such as the ones shown in Figure 1, showing Wal-Mart’s geographic

pattern of expansion in growing concentric circles around Bentonville, Arkansas, Neumark,

Zhang, and Ciccarella (2005) and Dube, Eidlin, and Lester (2005) have independently pro-

posed using an interaction of time and distance from Bentonville to address endogeneity in

both timing and locations. This instrument is valid as long as there is no spatial correlation

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in the dynamics of the outcome of interest that is unrelated to Wal-Mart.5 Drewianka and

Johnson (2006) sidestep the instrument problem by including a full set of county-specific

trends in their analysis.

With the exception of Graff and Ashton (1994), who obtained data directly from Wal-

Mart, early research on Wal-Mart used data collected for public sources and was typically

limited, for this reason, to small geographic areas. For example, Stone (1995) collected data

on Wal-Mart’s locations in several Iowa counties, and Hicks and Wilburn (2001) collected

opening dates for West Virginia stores. Basker (2005a) collected approximate opening dates

for all Wal-Mart stores from various public sources, including Wal-Mart Annual Reports,

annual directories of discount department stores published by Chain Store Guides, and spe-

cial Wal-Mart editions of Rand McNally Road Atlases.6 These data have since been used in

several papers, including Basker (2005b), Dube, Eidlin, and Lester (2005), and Drewianka

and Johnson (2006).7 Following a recent public relations campaign, Wal-Mart selectively

released data on store openings it had previously been reluctant to share; Neumark, Zhang,

and Ciccarella (2005) were the first to use these data, which have since also been used by

Basker (2006).8 An anti-Wal-Mart umbrella group called Wal-Mart Watch has also compiled

a list of all Wal-Mart’s store locations and opening dates, along with store characteristics,

including employment and square footage, which it makes available to researchers who sign

5Without overidentifying restrictions, there is no formal way of testing for the validity of any instrumentthat tries to correct for endogeneity in timing and/or location, but several common-sense tests do suggestthemselves. These include testing whether leads of the Wal-Mart variable have greater predictive powerthan the variable itself — which would suggest that the effect attributed to Wal-Mart actually started beforeWal-Mart’s entry — and whether Wal-Mart’s entry has a statistically or economically significant impact onsectors in which it does not compete, such as manufacturing or automobile dealerships.

6The data are available at: http://economics.missouri.edu/~baskere/data/. The appendices in Neu-mark, Zhang, and Ciccarella (2005) and Basker (2006) provide some detail — and contrasting perspectives— on the quality of the data.

7Khanna and Tice (2000, 2001, 2005) and Jia (2005) also use data from Chain Store Guides. Chiou(2005) queried Wal-Mart’s interactive store locator web site to find current store locations. Holmes (2005)uses data from Trade Dimensions on store locations and characteristics.

8In late 2005, Wal-Mart posted a spreadsheet with the original opening dates of its existing stores on itspublic relations site, http://www.walmartfacts.com but later modified the spreadsheet by removing theopening dates and years.

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a confidentiality agreement.9

Outcome data for national studies of Wal-Mart’s impact have come from both public

sources — such as County Business Patterns (used by Jia, 2005; Neumark, Zhang, and Ci-

ccarella, 2005; Basker, 2005a), the Quarterly Census of Employment and Wages (used by

Dube, Eidlin, and Lester, 2005; Drewianka and Johnson, 2006) — and private ones, such as

the American Chamber of Commerce Research Association (used by Basker, 2005b; Basker

and Noel, 2006). Use of private sources, such as competitors or suppliers, often requires

broadening the research question beyond Wal-Mart’s effect. Hausman and Leibtag (forth-

coming), for example, use data from AC Nielsen to study price impacts of “nontraditional”

food retail outlets (superstores, mass merchandisers, and clubs) on “traditional” outlets (gro-

cery stores and supermarkets). Census data from the Economic Census and the Longitudinal

Research Database are also subject to restrictions on disclosure that prevent studying the

economic impact of individual firms, but can be used to study broad patterns in the industry,

such as sources of productivity growth and the relationship between store size and chain size

(?Basker, Klimek, and Van, 2006), and the effect of superstores on incumbent grocery stores

(Davis, Freedman, Lane, McCall, Nestoriak, and Park, 2005). Finally, some recent research

in marketing has utilized private data from a single competitor (as in Singh, Hansen, and

Blattberg, forthcoming; Zhu, Singh, and Dukes, 2005).

4 Labor Markets

A new Wal-Mart store hires several hundred workers when it opens. Depending on local

market conditions, the number of applicants may be 5, 10, or even 25 times larger than the

number of positions advertised. In October, 2005, for example, 11,000 applicants applied for

400 positions at a new Wal-Mart store in Oakland, California. According to press releases

issued by Wal-Mart when new or renovated stores open for business, the median new or

9To contact Wal-Mart Watch, see http://www.walmartwatch.com/contact.

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newly-renovated Wal-Mart store has 400 employees (300 for Discount Stores, 425 for Super-

centers). But these increases in jobs are at least partially offset by job losses at competing

retailers that contract or exit as a consequence of Wal-Mart’s entry. The net effect on jobs

is positive, even five years after Wal-Mart’s entry, but it is quite small: While the number

of retail jobs in a county increases by 100 the year Wal-Mart opens a new store (relative to

what would have happened had Wal-Mart stayed out of the county), this net increase falls

to 50 after five years (Basker, 2005a). Consistent with these results, regulations restricting

entry of large retailers into French retail markets have had negative effects on employment

growth (Bertrand and Kramarz, 2002). The number of wholesale jobs declines by about 30 in

the long run, reflecting the fact that Wal-Mart is vertically integrated: unlike the merchants

it replaces, Wal-Mart does not rely on local wholesalers. Aggregate effects on county-level

employment — across all sectors in the local economy — are impossible to estimate precisely

(Basker, 2005a).

Even the small positive effect on retail jobs may be an artifact of the way in which

jobs are counted. County-level data on retail employment do not distinguish between part-

time and full-time jobs, so if Wal-Mart employs more part-time workers than the retailers

it replaces, the number of full-time equivalent (FTE) jobs may actually fall. Because there

is no definitive evidence on average hours of work by Wal-Mart employees compared with

other retail employees, it is impossible to evaluate the importance of this effect.

Another possible explanation for the positive employment effect is that Wal-Mart’s fa-

mously anti-union labor practices allow it to hire more workers, at lower wages, than many

incumbent retailers.10 Lower prices induce shoppers to buy more, which, in turn, prompts

Wal-Mart to hire even more workers.

Gains in retail employment in the county in which Wal-Mart opens may come at the

10There are no unionized Wal-Mart stores in North America. After meat packers in a Texas Wal-MartSupercenter voted to unionize in 2000, Wal-Mart switched to prepackaged beef and closed down its meatpacking department. In 2005, Wal-Mart closed a store in Quebec whose workers had voted to unionize.

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expense of jobs across county lines. Attempts to quantify cross-county effects have not

been successful (Basker, 2005a, reports very large confidence intervals and no conclusive

results), but one possible indirect test is that the employment effect of Wal-Mart should

be relatively larger (more positive) in geographically small counties — with many “close”

shopping opportunities — than in geographically large counties. Another way to evaluate

the importance of this explanation would be to estimate the rate at which Wal-Mart’s impact

diminishes with distance using finer geographic data, for example from Zip Code Business

Patterns. Neither of these approaches has been pursued to date.

Estimates of Wal-Mart’s impact on labor markets that do not properly account for Wal-

Mart’s preference for thriving, growing markets over foundering, declining ones are subject

to omitted variable and selection biases. Basker (2005a) addresses selection bias in two

ways: by dropping from the sample very small and historically declining counties — the

sorts of places Wal-Mart very rarely enters — and by using information on stores’ planned

opening dates embedded in their company-assigned store numbers. She shows that, after

these adjustments, there is no pre-existing trend in retail employment, and that estimates

of Wal-Mart’s effect on unrelated industries, such as manufacturing, are statistically and

economically small. (Most of Wal-Mart’s purchasing is done through centralized facilities,

so adding a single store in a county is unlikely to affect local manufacturing employment.) A

recent study by Neumark, Zhang, and Ciccarella (2005) uses an alternative methodology and

concludes that Wal-Mart is a net job destroyer, but interpreting this result is problematic

because it requires assuming away spatial correlation in employment patterns.11

Very little is known about Wal-Mart’s effect on the composition of the work force — its

age, education, and experience — and the wages it receives. Since wages are a function of the

11Using Neumark, Zhang, and Ciccarella’s preferred specification to estimate the effect of Wal-Mart onmanufacturing employment yields an estimate of 500-600 new manufacturing jobs due to each Wal-Martstore. Moreover, the effect they attribute to Wal-Mart occurs in counties both with and without Wal-Martstores, and begins before Wal-Mart first enters the county. For a technical discussion of their methodology,see Basker (2006).

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reliability and outside opportunities of the workers, as well as hours and shifts worked, there

is little to be learned about the market power, efficiency, or even “fairness” of Wal-Mart’s

wage policy without controlling for these factors. The exact pay structure (starting wage and

raises) varies across Wal-Mart stores, depending on local market conditions. The existing

analysis on average retail employee compensation (by Neumark, Zhang, and Ciccarella, 2005;

Dube, Eidlin, and Lester, 2005), which finds negative effects of Wal-Mart on retail employees’

pay, does not address these factors due to data limitations, and, moreover, suffers from the

methodological problems discussed above. Micro data from the decennial Census or a large

scale survey such as the Current Population Survey (CPS) may help disentangle some of

these effects, but may require broadening the question to the wage differences between large

retail chains and smaller retailers for statistical power.

5 Consumers

Most consumers shop at Wal-Mart because of its lower prices. Answering an open-ended

question soliciting the “best thing about Wal-Mart,” 50% of respondents of a Pew Research

Center poll named low prices, 22% named broad selection/variety, and 13% gave answers

related to location, hours, and other convenience factors (Pew Research Center for the People

and the Press, 2005). Poorer consumers are much more likely to shop at Wal-Mart than are

richer ones, and have benefited disproportionately from Wal-Mart’s rise. In the Pew survey,

53% of respondents reporting annual earnings below $20,000 said they shopped at Wal-Mart

“regularly,” compared with 33% of respondents earning more than $50,000 (Pew Research

Center for the People and the Press, 2005). The average annual household income among

Wal-Mart shoppers is $40,000-45,000, roughly equal to the U.S. median household income,

compared with $60,000 for Target shoppers and $74,000 for Costco shoppers (Greenhouse,

2005; Mui, 2005).

Wal-Mart’s low prices exert pressure on other retailers to lower their prices as well.

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Estimates of the differences between Wal-Mart’s and competitors’ prices range from 8%-27%,

depending on the market and the selection of products (Hausman and Leibtag, forthcoming;

Basker and Noel, 2006). Because most competitors lower their prices in reaction to Wal-

Mart’s competitive pressure, even consumers who do not shop at Wal-Mart benefit from its

lower prices. On average, competitors lower prices by 1-5% in response to Wal-Mart’s entry

(Basker, 2005b; Basker and Noel, 2006).

Wal-Mart sells not only a wide range of products (and a growing menu of services) but

also convenience associated with one-stop shopping. In many cases, consumers would be

willing to pay a premium for this convenience, so the fact that Wal-Mart charges less than

specialist retailers, rather than more, is further proof of its efficiency. The convenience factor

helps explain why for some products, such as DVDs, consumers appear to have a preference

for shopping at Wal-Mart, even after accounting for price and location differences (Chiou,

2005).

For some goods, however, lower prices and increased convenience are partially mitigated

by lower service levels, reduced product offerings, and other disamenities. It is often observed

that Wal-Mart carries fewer brands and varieties of common goods — that it specializes in

product breadth, rather than depth — a strategy that has contributed to its lower inven-

tory costs and stronger bargaining position with suppliers. By revealed preference, many

consumers are willing to accept this tradeoff, but those whose tastes do not conform to

Wal-Mart’s selection are made worse off by it. Wal-Mart does not carry music CDs whose

lyrics or cover art it considers offensive, for example. Consumers seeking such items have to

go elsewhere, and often pay a higher price. This effect is similar to the negative “preference

externalities” borne by consumers whose tastes do not conform with the mainstream for

products such as local media and restaurants (see Waldfogel, 2003).

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6 Competitors

Wal-Mart’s competitors divide into two broad categories: “local” competitors, mostly in-

cumbent retailers in markets Wal-Mart enters, and other large retail chains with which

Wal-Mart competes “globally,” in many markets. Wal-Mart’s entry causes a small number

of local competitors in each market to shut down. Its effect on its global competitors is more

complicated, and needs further study to be properly quantified.

6.1 Local Competitors

Each new Wal-Mart store reduces local competitors’ market share and profit margins, and,

on average, causes a few businesses to close. Wal-Mart’s entry compounds normal “churn,”

which is already high in the retail sector — 50-60% of retailers that exist one year disappear

within 5 years (Jarmin, Klimek, and Miranda, 2004) — by creating a tougher competitive

environment, generating net exit. Estimates of the number of retail establishment exits due

to Wal-Mart range between 2 and 5, with the lower end representing exits of small general

merchandise stores, such as dollar and variety stores, and the upper end including all retailers

(Jia, 2005; Basker, 2005a). These effects have been quite stable over time, despite the chain’s

massive growth and increased efficiency: estimates for 1988 and 1997 are extremely similar,

and also quite similar to estimates of the effect of Kmart on small businesses (Jia, 2005).

The net effect masks variation in Wal-Mart’s impact across both location and retail

category. Within a county, some businesses fare better than others, and there may be pockets

of decline and other pockets of growth, both at the sub-sector level (e.g., grocery stores vs.

home improvement stores) and geographically. For example, entry of a Wal-Mart “Discount

Store” (which does not sell groceries) has been shown to increase revenue at an adjacent

traditional grocery store, but to reduce revenue at a grocery store 2 miles away (Zhu, Singh,

and Dukes, 2005). This effect is similar to a mall anchor store which increases traffic to

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smaller stores in the mall (Pashigian and Gould, 1998; Gould, Pashigian, and Prendergast,

2005).

Incumbents may respond to Wal-Mart’s entry into their local market by pursuing a

variety of strategies, such as emulating Wal-Mart’s low prices and infrequent promotions,

or making other format changes such as changing the level of service or the composition of

products offered. As noted earlier, price reductions among local competitors are a common

response to Wal-Mart’s entry (Hausman and Leibtag, forthcoming; Basker and Noel, 2006).

Wal-Mart’s “every day low pricing” (EDLP) strategy, characterized by stable prices and

few discounts, has also changed high-frequency price dynamics. Together with Wal-Mart’s

technology investment, EDLP has been credited with contributing to Wal-Mart’s low cost

and high demand. Because pricing strategies (EDLP vs. frequent promotions) are strategic

complements (Ellickson and Misra, 2006), Wal-Mart’s expansion has caused other retailers

to change their own pricing strategies. And regardless of pricing, incumbent competitors

experience large reductions in revenues: In one study of a single market in upstate New

York, an incumbent supermarket lost 17% of is sales volume — but did not shut down — in

the year following a Wal-Mart Supercenter entry 2 miles away (Singh, Hansen, and Blattberg,

forthcoming). Local competitors are also likely to react to Wal-Mart’s entry by changing their

service levels and mix of goods. In a series of papers, Stone (1991 and elsewhere) recommends

local merchants increase service levels and increase product assortment to compete with Wal-

Mart.

Most of these changes have not been quantified and are not accounted for in existing

studies. The Bureau of Labor Statistics, which constructs the Consumer Price Index, makes

the strong assumption that all price differences between Wal-Mart and other retailers reflect

quality differences, either of the merchandise or the shopping environment (Hausman and

Leibtag, 2004). As a result, Wal-Mart’s lower prices only reduce measured inflation through

their effects on competitors’ prices. Competitors are assumed to make no changes in service

levels or other amenities, although some price changes may reflect changes in the quality of

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the service. Relatedly, Sobel and Dean (2006) cite anecdotal evidence that the composition

of retailers changes following Wal-Mart’s expansion into an area, but this has not been

confirmed in any systematic studies.

6.2 Global Competitors

Large retail chains account for a growing share of all retail sales in the U.S. (Jarmin, Klimek,

and Miranda, 2005). As large retail chains grow in importance, so do the strategic interac-

tions among them. Wal-Mart’s decisions not only affect its large chain competitors, but are

also shaped by their anticipated responses, creating an interaction that is more subtle and

complex than the relationship between Wal-Mart and any of its local competitors.

Location patterns of the major chain retailers are jointly determined, with each chain

exerting a deterrent effect on the others. Kmart and Target, for example, take Wal-Mart’s

current and anticipated store locations into account when they decide which markets to

enter. Wal-Mart’s deterrent effect on Kmart and Target is large relative to the counter

effect these competitors exert on Wal-Mart, and has increased over time (Jia, 2005; Zhu,

Singh, and Manuszak, 2005). This deterrent effect, combined with economies of density,

amplifies the chains’ natural advantage in different regions — Wal-Mart, for example, is

most popular in the South and Midwest (Pew Research Center for the People and the Press,

2005). Because the location choices and expansion patterns of each retail chain take account

of economies of density as well as the natural advantages of each chain, and feed back to

the choices of the other major retailers, studies of Wal-Mart’s impact on local as well as

global competitors that do not account for this complex relationship may be severely biased.

Jia (2005) estimates that failing to account for the equilibrium relationship among major

chains results in under-estimating Wal-Mart’s impact on small retailers by 50-60%. Format

choices are also endogenous, and jointly determined. Wal-Mart, Kmart, and Target have

made efforts to differentiate themselves not only geographically but also in product space,

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with Wal-Mart operating more Supercenters, and Target aiming at somewhat higher-income

consumers (Zhu, Singh, and Manuszak, 2005; Graff, 2006).

The competition among these retail chains entails many other strategic choices, for ex-

ample regarding the level and choices of investment. Strategic investment in technology,

product variety, or relationships with overseas suppliers, may lead to inefficiently high levels

of investment by some firms. Ellickson (2004) demonstrates that quality investments by

competing oligopolistic grocery stores are strategic complements, and speculates that the

same applies to other retail sectors, but this conjecture has not been tested. On the other

hand, in environments in which Wal-Mart’s investments have positive spillovers to its com-

petitors — for example, as discussed later on, its political pressure to lower trade barriers

has lowered costs for its competitors as well — investment levels may be too low relative to

the optimal level. Without models of this strategic setting and data on actual investment

levels, we cannot evaluate the relative importance of these two counteracting forces.

7 Suppliers

Wal-Mart’s buying power has affected both the business relationships between Wal-Mart

and its suppliers and the way these suppliers organize internally. Several hundred of Wal-

Mart’s major suppliers have permanent offices near Wal-Mart’s headquarters in Bentonville

to facilitate these relationships (Useem, 2003); information sharing occurs in real time via

Retail Link. Wal-Mart also serves as a coordinating device for technology adoption where

network externalities affect the profitability of adoption. Wal-Mart’s entry into Mexico, for

example, has resulted in large efficiency gains among (Mexican) upstream suppliers of soaps,

detergents, and surfactants (Javorcik, Keller, and Tybout, 2006). Most recently, Wal-Mart

is requiring its major suppliers to provide Radio Frequency Identification tags in all pallets

it receives (Boyle, 2003).

Wal-Mart’s growth, and with it buying power, was originally motivated by a desire

15

to obtain countervailing power against manufacturers and thereby lower costs (Graff and

Ashton, 1994; see Chen, 2003, for a model of this phenomenon). Wal-Mart has used its

bargaining power to push down wholesale prices leading some to blame it for many business

failures among U.S. producers of consumer goods (see, e.g., Fishman, 2006). It is hard to

know how much truth there is to these accusations. Wal-Mart’s large-scale suppliers perform

better, financially, than large companies supplying other retailers, although Wal-Mart may

select suppliers in part on the basis of their financial strength, so causality is hard to infer

from this pattern. Moreover, the opposite correlation — Wal-Mart’s suppliers have weaker

financial positions than their counterparts — holds for small-scale producers (Bloom and

Perry, 2001).

The welfare implications of Wal-Mart’s dominant position in many input markets have

never been quantified, in part because neither Wal-Mart nor its suppliers have been willing

to share data or even discuss their relationships. If Wal-Mart’s better bargaining position

results in shifting rents from suppliers to the retailer, or reducing the extent of double

marginalization, its welfare implications could be positive, but if monopsony power allows

Wal-Mart to restrict inputs — and therefore output — relative to a competitive level, welfare

implications could well be negative.

Wal-Mart’s suppliers are disproportionately foreign and increasingly producing private-

label goods. Wal-Mart was not always a major importer. From 1985 to 1992, Wal-Mart’s

“Buy American” campaign received much media attention. Wal-Mart promised, among other

things, to pay up to a 5% premium for U.S.-made goods (Zellner, 1992). This campaign ended

abruptly in late 1992 after Dateline NBC aired a segment accusing Wal-Mart of producing

private-label goods in Bangladesh, smuggling textiles into the U.S. in excess of quotas, and

placing imported clothes on racks marked “Made in the USA” (Gladstone, 1992). By 2004,

Wal-Mart accounted for $18 billion worth of imports from China alone; it accounts for a

much larger share of imports of consumer goods. Wal-Mart sources 100% of its apparel from

low-cost countries, and sells a much higher share of private-label apparel than other national

16

apparel sellers (80% vs. an average of 35% among the top-ten apparel retailers, according to

Gereffi, 2006). Wal-Mart’s scale facilitates its disproportionate use of direct global sourcing,

because direct sourcing entails large fixed costs which require large volumes to justify. At the

same time, global sourcing has contributed to Wal-Mart’s advantage over smaller retailers

— by allowing it to procure inputs at lower cost — and as trade barriers have fallen, making

imports cheaper, Wal-Mart’s advantage has increased even further (Basker and Van, 2006).

8 Political Economy and Government Policy

As a chain with many retail outlets, Wal-Mart interacts with all levels of government. At

the federal level, Wal-Mart’s dependence on global suppliers guides its interest in loosening

U.S. trade policy. To that end, it has participated and helped shape CAFTA, the Central

American Free Trade Agreement (Cummings, 2004), and has lobbied for other trade deals.

At the state and local levels, Wal-Mart has an interest in regulations that affect wage and

benefit policies, zoning, subsidies and infrastructure development.

Until 1998, when Wal-Mart hired its first Washington lobbyist, it was fairly detached

from the national political process. By 2005 its Political Action Committee (PAC) was one of

the largest in Washington (Cummings, 2004). In the 2004 election cycle, the Wal-Mart PAC

donated over $2.7 million to political campaigns, four times as much as it had contributed

in 2000, and more than 10 times the amount it contributed to national campaigns in 1996.12

Wal-Mart’s PAC was the twentieth largest contributor in the 2004 election cycle, and the

ninth largest contributor to the Republican Party and Republican candidates. A major

objective of its political involvement is to reduce the trade barriers the U.S. has erected

against countries from which Wal-Mart would like to import more.

12The fraction of Wal-Mart’s contributions that went to Republican candidates has declined overthis period from 98% to 80%. More details are available from the Center for Responsive Politics athttp://www.crp.org.

17

Minimum wage and benefit laws affect Wal-Mart’s cost advantage and its incentives to

operate in different communities. Maryland’s “Fair Share Health Care Act,” which would

have required Wal-Mart to spend at least 8% of its total wage bill on health insurance, was

to take effect in 2007, but was overturned by a judge in July 2006. The bill applied to

all companies with at least 10,000 employees in the state, but Wal-Mart, which had 15,681

employees in Maryland in March 2006, was the only company to pass this threshold. While

this bill has been overturned, several other states (including New Jersey, Tennessee, and

Wisconsin) have considered similar legislation. Wal-Mart could react to such bills by lowering

wages, reducing employment, and possibly shutting down stores — or at least opening new

stores at a reduced rate. In a similar vein, Chicago’s City Council approved a minimum wage

bill in July 2006 — later vetoed by Mayor Daley — which would have doubled the effective

minimum wage paid by stores with at least 90,000 square feet, operated by retailers with at

least $1 billion in annual sales. Such laws benefit competitors at the expense of consumers,

and almost certainly workers as well. If any such a law ever takes effect, a differences-in-

differences comparison of the behavior of Wal-Mart and other large retailers in the affected

city or state with their behavior in comparable regions (neighboring states or other large

cities, for example) with regard to employment levels, hours of operation, wages, benefits,

and prices, could be informative to policymakers.

Local governments have been split in their response to Wal-Mart: while some have at-

tempted to limit Wal-Mart’s access with zoning regulations and “living wage” ordinances,

others have welcomed Wal-Mart with infrastructure developments and other subsidies. An

anti-Wal-Mart organization called Good Jobs First found that 90% of Wal-Mart’s Distribu-

tion Centers, and many of its stores, received government subsidies totaling over $1 billion

(Mattera and Purinton, 2004). Places that have limited Wal-Mart’s entry have often cited

its potential impact on urban sprawl, traffic and congestion; research is needed to test these

claims. One reason some communities offer Wal-Mart “welcome mats” is the common, but

statistically unconfirmed, perception that it is better to have a Wal-Mart open in one’s

18

own jurisdiction than in a neighboring community. The resulting competition among local

governments may lead to inefficient subsidization of Wal-Mart stores. The alternative ex-

planation for subsidization — that Wal-Mart would not open in the area without it — is

harder to support given evidence that subsidized Wal-Mart stores are no less profitable than

unsubsidized stores, gross of the subsidies (Jia, 2005).

9 Concluding Remarks

Wal-Mart’s productivity advantage, due to its large and early investment in information

technology, has permanently changed the retail sector. As its large chain competitors strive

to emulate Wal-Mart’s technological innovations, and suppliers worldwide become increas-

ingly connected to their downstream buyers, the retail sector as a whole has become more

efficient at providing consumers with the goods they want at better prices and with increased

convenience. It is impossible to predict how long Wal-Mart can remain on the frontier of

productivity and innovation, and maintain its cost and price advantage over its rivals. For

the time being, the company has ambitious expansion plans, including the addition of ge-

ographic markets, both in the U.S. and abroad, and new products, including organic foods

(Warner, 2006) and banking services.

Many of Wal-Mart’s effects remain unquantified. Wal-Mart’s effect on local government

expenditures, urban sprawl, traffic, crime, and social capital, have received attention in

popular discourse, but there are no systematic studies establishing Wal-Mart’s causal role

and quantifying its effect on these outcomes.13 Only anecdotal evidence exists about its

effects on product selection, and its impact on upstream industrial structure and the location

of production are only beginning to be explored. Retail markets differ in important ways

across countries, and Wal-Mart’s impact is likely to vary with industrial structure, regulation,

and consumer tastes, but there are no studies quantifying the local impact of Wal-Mart’s

13Hicks (2005a,b) takes a first look at Wal-Mart’s impact on government expenditures.

19

international stores. In this context, Wal-Mart’s exit from the South Korean market in May

2006 and from the German market in July 2006 could serve as useful case studies.

What is known about Wal-Mart’s economic impact mainly concerns its short- and

medium-run partial-equilibrium effects, but as it enters more and more markets, the general

equilibrium interactions between these markets and players could overwhelm any partial-

equilibrium effects Wal-Mart has on one market or another. In the long run, Wal-Mart’s

impact on local, national, and global economies will depend on the general-equilibrium re-

sponses of other firms, consumers, workers, and governments, and on the strategic interac-

tions between these players and Wal-Mart.

20

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(a) 1965 (b) 1973

(c) 1981 (d) 1989

(e) 1997 (f) 2005

Figure 1. Wal-Mart Store Locations, 1965-2005

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(a) 1990 (b) 1995

(c) 2000 (d) 2005

Figure 2. Wal-Mart Supercenter Locations, 1989-2004

26