Consumer benefits from increased competition in shopping outlets: Measuring the effect of Wal‐Mart

Abstract

Non‐traditional retail outlets, including supercenters, warehouse club stores, and mass merchandisers, have nearly doubled their share of consumer food‐at‐home expenditures in the U.S. from 1998 to 2003. Wal‐Mart supercenters have had the biggest impact on food retailing as they compete most closely with traditional supermarkets and offer many identical food items at an average price about 15%–25% lower than traditional supermarkets. We consider consumer benefits from this market share growth and estimate the effect on consumer welfare of entry and expansion into new geographic markets. We calculate the compensating variation that arises from both the direct variety effect of the entry of supercenters and the indirect price effect that arises from the increased competition that supercenters create and find the average effect of the total compensating variation to be 25% of food expenditures. Since we find that lower income households tend to shop more at these lower priced outlets, a significant decrease in consumer surplus arises from restricting entry and expansion of supercenters into new geographic markets. Copyright © 2007 John Wiley & Sons, Ltd.