The WalMart Prices: Implications and Explanation

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The WalMart Prices Implications and Explanation

• Alice Nakamura (University of Alberta)
• Leonard Nakamura (Federal Reserve Bank of
  Philadelphia)
• Marc Prudhomme (Statistics Canada)
• Disclaimer The views expressed here are those of
  the authors and do not necessarily reflect those
  of the Federal Reserve Bank of Philadelphia, the
  Federal Reserve System,or Statistics Canada.

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Overview

• This reports a preliminary stage in the
  investigation of WalMart's impact on measured
  retail prices and productivity in US and Canadian
  economy
• There has been a spate of work done on WalMart
  (more than 20 academic papers)
• Can state and provincial data permit us to
  discern productivity impacts of WalMart on the
  retail sector as a whole?

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What is WalMarts impact on productivity?

• What has been the impact of the impressive
  success of WalMart stores on overall retail
  productivity?
• Measured retail productivity growing briskly in
  US and Canada
• Particularly for general merchandise retailers
• Not for grocery stores
• Is this due to WalMart?

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McKinsey Yes, WalMart is crucial

• According to the 2001 McKinsey Global
  productivity report, From 1995-2000, general
  merchandise retailers doubled their productivity
  growth rates (10.1 percent per year from an
  already high 4.8 percent per year) and
  contributed 16 percent of the total retail
  productivity growth jump. The productivity jump
  in this sub sector was primarily due to
  heightened competitive intensity (due to the
  continued growth of WalMart) and increased
  consumer substitution toward higher-valued goods.

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Hausman and Leibtag Wal-Mart's productivity is
under-measured

• Wal-Marts goods are not considered the same as
  predecessor retailers
• Wal-Mart's prices may be 20 to 25 below prices
  of other general merchandise retailers
• Hausman and Leibtag discern big price
  differentials between WalMart and competitors in
  grocery items
• Are these price differentials due to lower
  quality?
• Basker data suggests that WalMart forces
  competitor prices lower
• Perhaps retail productivity has risen for other
  reasons
• Rapidly rising quality of electronics is
  attributed to retailers as well

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Our preliminary work

• Begins with state and provincial retail data
• Our data are for all of retailers, not just
  general merchandisers
• What is impact of WalMart stores on state and
  provincial retail productivity
• Use fixed effects regressions with year dummies
• Number of stores in operation (S) is our
  independent variable of interest
• Problem with endogeneity
• Instruments constructed
• Scale stores variable by inverse of size of
  state or provincial retail employment in base
  year (to reduce heterogeneity)

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Distance and WalMart store openings

• As Holmes has shown, WalMarts success depended
  on economies of density.
• These economies provided a strong incentive to
  minimize costs by gradually building out stores
  in a diffusion process that originated in
  Arkansas.
• This provides a potential instrument distance
  from Arkansas.
• We used state centroids to estimate the date of
  WalMarts entry. Regressing year of WalMart
  entry on centroid distance from Arkansas has an
  adjusted Rsq of .87.

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Distance From Arkansas (in miles) by Year of
First Walmart Store Opening(a set of coordinates
for each of the contiguous United States, except
for Arkansas)
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Cumulative WalMart store openings usually plateau
in a state after about 15 yearsCreate an
average WalMart time profile of entry for
instruments
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Create an instrument for each state

• Based on
• Distance from Arkansas (determines date of first
  entry)
• Average cumulative stores open
• Assume store entry into the state is complete 15
  years after entry
• Profile is constant thereafter

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US result

• WalMart openings have a small negative impact on
  measured US retail productivity
• Not capturing WalMart impact on productivity very
  well in state data
• State level retail GDP allocated to states based
  on employment
• Also, perhaps not capturing dynamics very well
  (perhaps need spatial lag model)

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Estimation results
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In Canada, WalMart entered by acquisition

• Canada entered WalMart in 1994 after purchasing
  the Woolco chain and reopening 133 stores, with
  an immediate presence in 9 of the 10 provinces.
• Havent come up with good instrument, using lags
  of store openings as instruments

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Canada

• Reasonably sizeable WalMart impact on retail
  productivity
• Estimate that WalMart entry resulted in 10
  percent increase in retail productivity over 12
  year period
• Use only lags as instruments
• Not tightly estimated (with bootstrap standard
  errors just insignificant at 10 percent level)
• Timing of WalMart entry may be a problem
• Based only on 4 largest provinces (Ontario,
  Quebec, British Columbia, Alberta) 83 percent
  of total population

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Conclusion

• Preliminary work suggests that this methodology
  may be useful in uncovering the impact of WalMart
  on measured productivity
• WalMart has raised productivity in fact, but
  possibly not as we measure it
• Suggestions welcome