Econometrica

What Happens When Wal‐Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry

Dept. of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142, U.S.A. and NBER; pjia@mit.edu

This paper is a revision of Chapter 1 of my thesis. I am deeply indebted to my committee members—Steven Berry, Penny Goldberg, Hanming Fang, and Philip Haile—for their continual support and encouragement. Special thanks go to Pat Bayer and Alvin Klevorick, who have been very generous with their help. I also thank the editor, three anonymous referees, Donald Andrews, Pat Bajari, Donald Brown, Judy Chevalier, Tom Holmes, Yuichi Kitamura, Ariel Pakes, Herbert Scarf, and seminar participants at Boston University, Columbia University, Duke University, Harvard, MIT, Northwestern University, NYU, Princeton, Stanford University, UCLA, UCSD, University of Chicago, University of Michigan, University of Minnesota, University of Pennsylvania, and participants of the 2006 Review of Economic Studies European Meetings in Oslo, Essex, and Tel Aviv for many helpful comments. Financial support from the Cowles Foundation Prize and a Horowitz Foundation Fellowship is gratefully acknowledged. All errors are my own. Comments are welcome.

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Panle Jia

Dept. of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142, U.S.A. and NBER; pjia@mit.edu

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First published: 24 November 2008

https://doi.org/10.3982/ECTA6649

Cited by: 252

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Abstract

In the past few decades multistore retailers, especially those with 100 or more stores, have experienced substantial growth. At the same time, there is widely reported public outcry over the impact of these chain stores on other retailers and local communities. This paper develops an empirical model to assess the impact of chain stores on other discount retailers and to quantify the size of the scale economies within a chain. The model has two key features. First, it allows for flexible competition patterns among all players. Second, for chains, it incorporates the scale economies that arise from operating multiple stores in nearby regions. In doing so, the model relaxes the commonly used assumption that entry in different markets is independent. The lattice theory is exploited to solve this complicated entry game among chains and other discount retailers in a large number of markets. It is found that the negative impact of Kmart's presence on Wal‐Mart's profit was much stronger in 1988 than in 1997, while the opposite is true for the effect of Wal‐Mart's presence on Kmart's profit. Having a chain store in a market makes roughly 50% of the discount stores unprofitable. Wal‐Mart's expansion from the late 1980s to the late 1990s explains about 40–50% of the net change in the number of small discount stores and 30–40% for all other discount stores. Scale economies were important for Wal‐Mart, but less so for Kmart, and the magnitude did not grow proportionately with the chains' sizes.