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

33 Pages Posted: 26 Oct 2009

See all articles by Emek Basker

Emek Basker

U.S. Census Bureau - Center for Economic Studies; University of Missouri - Department of Economics

Michael D. Noel

Texas Tech University

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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 ordinary least squares and two instrumental-variables 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 entry by a Wal-Mart Supercenter 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. Low-end grocery stores, which compete more directly with Wal-Mart, cut their prices more than twice as much as higher-end stores. We confirm our results using a falsification exercise, 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.

Suggested Citation

Basker, Emek and Noel, Michael D., The Evolving Food Chain: Competitive Effects of Wal-Mart's Entry into the Supermarket Industry. Journal of Economics & Management Strategy, Vol. 18, Issue 4, pp. 977-1009, Winter 2009, Available at SSRN: https://ssrn.com/abstract=1492375 or http://dx.doi.org/10.1111/j.1530-9134.2009.00235.x

Emek Basker (Contact Author)

U.S. Census Bureau - Center for Economic Studies ( email )

4600 Silver Hill Road
Washington, DC 20233-9100
United States

University of Missouri - Department of Economics ( email )

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Columbia, MO 65211
United States

HOME PAGE: http://emekbasker.org

Michael D. Noel

Texas Tech University ( email )

237 Holden Hall
Box 41014
Lubbock, TX 79407
United States

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