The Evolving Food Chain: Competitive Effects of Wal-Mart's Entry into the Supermarket Industry

Abstract:     
We analyze the effect of Wal-Mart's entry into the grocery market using a unique store-level price panel data set. We use OLS and two IV specifications to estimate the effect of Wal-Mart's entry on competitors' prices of 24 grocery items across several categories. Wal-Mart's price advantage over competitors for these products averages approximately 10%. On average, competitors' response to Wal-Mart's entry is a price reduction of 1-1.2%, mostly due to smaller-scale competitors: the response of the big three supermarket chains (Albertson's, Safeway, and Kroger) is less than half that size. We confirm our results using a falsification exercises, in which we test for Wal-Mart's effect on prices of services that it does not provide, such as movie tickets and dry cleaning services.

Number of Pages in PDF File: 37

Keywords: Wal-Mart, Retail Prices, Supermarkets, Price Competition

JEL Classification: L11, L13, L81

working papers series