Density Versus Differentiation: The Impact of Wal-Mart on the Grocery Industry

Posted by D. Daniel Sokol

Paul B. Ellickson, University of Rochester - William E. Simon Graduate School of Business Administration and Paul L.E. Grieco, Pennsylvania State University - Department of Economics have posted Density Versus Differentiation: The Impact of Wal-Mart on the Grocery Industry.

ABSTRACT: This paper empirically examines the impact of entry by Wal-Mart on competition in the supermarket industry. Using a detailed panel dataset spanning 1994 to 2006, we estimate the impact of Wal-Mart on three key outcome variables (revenue, employment, and store size), controlling for persistent local trends and systematic differences across markets by exploiting the detailed spatial structure of our store-level census. We find that Wal-Mart's impact is highly localized, affecting firms only within a tight, three-mile radius of its location. Within this radius, the bulk of the impact falls on declining firms - entry and expansion by growing firms are essentially unaffected. Moreover, the stores most damaged by Wal-Mart's entry are the outlets of larger chains. This suggests that Wal-Mart's expansion into groceries is quite distinct from its earlier experience in the discount industry, where the primary casualties were single outlet firms and sole proprietorships. This contrast sheds light on the role density economies play in shaping both equilibrium market structure and economic geography. In the case of grocery competition, high travel costs and the perishable nature of the product itself appear to impart sufficient horizontal differentiation to offset the scale economies that Wal-Mart has exploited to the detriment of far-flung competitors so effectively in the past.