Monday, May 25, 2009
Do prices fall faster when Wal-Mart is around? The effect of competition and reputation on cost pass-through and price adjustment
Posted by D. Daniel Sokol
M. Andrea Martens (Illinois - Agriculture and Consumer Economics) asks, Do prices fall faster when Wal-Mart is around? The effect of competition and reputation on cost pass-through and price adjustment.
ABSTRACT: This study analyzes Wal-Mart’s pricing practices and its inﬂuence on competitors’ input cost transmission. Previous attempts to analyze Wal-Mart’s pricing strategy in the United States have been limited by the company’s refusal to provide scanner data to third party research ﬁrms such as AC Nielsen. This is the ﬁrst study to observe Wal-Mart’s prices over an extended period of time. Using weekly-store level price data between 2001 and 2006 that government oﬃcials collected in 12 Mexican cities, I ﬁnd that Wal-Mart adjusts its prices 1/3-3 times slower to wholesale price increases than other retailers and responds 5-7 times faster to wholesale price decreases than its competitors. This evidence is robust to the comparison of Wal-Mart to other hypermarkets that oﬀer “every day low prices” and to potential endogeneity of Wal-Mart’s location choices. All retailers respond asymmetrically to wholesale cost changes. However, retailers other than Wal-Mart respond twice as fast to wholesale price increases than to decreases, while Wal-Mart behaves in the opposite way. I ﬁnd no evidence that proximity to a Wal-Mart supercenter or the level of competition aﬀects the speed of price adjustment of retailers.