The Effects of WalMart on Local Economies - Case Study Example

The Effects of WalMart on Local Economies of the of the No Contents Contents 2 Introduction 3 WalMart Market Structure 4 Elasticity of Demand for WalMart 7 Resource and Product Market 7 Problems in WalMart 8 International Economy 9 Conclusion 9 References 10 Introduction In the contemporary era, WalMart is recognized as the most prominent, private profit making institution in global marketplace. The researchers in the market often use the term ‘WalMart’ effect to imply various positive and negative impacts created by the company in the global economy. The scale and scope of operations of WalMart is quite extensive in the business world. Such giant commercial activities of the company often allow it to enjoy several competencies in marketplaces (Tucker, 2010). However, it is true that when a large corporate organization, like, WalMart, operates in the local economies, it generates substantial changes in the political, social, economic and cultural spheres of these smaller economies. Researchers have claimed that large scale market power of WalMart has forced several small, private retail firms out of business. Most of the other smaller firms in local economies, at present, strive to achieve low costs and economies of scale like, WalMart and this has forced these firms to lower its employee wages. Concentrated power of WalMart in the market has reduced competitive strength of other smaller firms in the local economies. This paper will precisely explain few effects generated by the giant organization of WalMart in local economies. Demand and Supply Analysis The giant multinational company of WalMart owns several departmental stores and warehouses across the markets, where it operates. The company is considered to be the largest retailer in the global economy. The company sales a wide range of consumer care products. The company through its strategic business styles connects to the actual producers of the goods that it sells to consumers. This allows the company to set prices of several products way below that of the competitors in the local economies. Moreover, in local market places, the company sells a wide variety of products to the consumers. The ‘Supercenters’ of the company is known to offer groceries, apparels, hardware and optical services products to customers. Thus, consumers in the local economies experience availability of a large variety of goods and services from WalMart stores. The prices of most products and services offered by the company are also lower than that offered by small scale retailers in the local economies. So, since its inception, the sale of the company is significantly increasing with its profit. This indicates that the consumers in local and major economies are demanding for more products and services that are sold in the WalMart stores. The net income of the company was US $ 16.99 in 2013. Hence, the company has adopted the strategy of increasing supply and lowering product prices, in order to experience greater demand in the market. Figure 1: WalMart Demand and Supply Analysis (Source: Authors Creation) The above graph reflects that when supply of products for a company increases from S1 to S2, the price falls from P1 to P2 and the quantity demanded in the market rises from Q1 to Q2. Thus, according to the law of demand, low prices of WalMart products in the market have improved its product demand across all local economies (Renkow, 2005). WalMart Market Structure The theory of economics claims that competition should be encouraged in marketplaces to assure greater efficiency in resource allocation. The net social welfare in any market will be maximized, if the free forces of demand and supply clear the market equilibrium. However, it is true that giant retailing firms in U.S., like, WalMart and Target, enjoy concentrated market powers in the industry. The costs of operations of these firms are low as they enjoy benefits of high scale market demand, favorable government policies as well as high economic surplus for extensive internationalization (Dawar & Stornelli, 2012). Figure 2: WalMart Market Structure (Source: Foster, McChesney & Jonna, 2011). The above graph explains the share of WalMart in the total wholesale food market in U.S. It can be stated that giant retail firms, like, WalMart, Costo Wholesale Corporation and Dollar Tree, enjoy monopolistic competition in the U.S. food industry (Foster, McChesney & Jonna, 2011). Even so, only if local economies are considered, it can then be stated that WalMart, in context of local economies, is acting as a monopolist in the market. Figure 3: Falling Share of Small Scale Retailers (Source: Banjo, 2013) From the above graph, it can be said that the market share of WalMart is increasing in the local economies. This is because shares of the small retailers in these economies are falling. Figure 4: Short and Lon Run Equilibrium in Monopoly (Source: Mankiw, 2011) As denoted by the above graph, WalMart, in all local economies, enjoy supernormal profit (revenue>cost), both in short and long run, as the company acts as a monopolist in these marketplaces. Elasticity of Demand for WalMart The products and services that are traded by WalMart are similar to that of other giant and small scale retailers in the same industry. Nonetheless, consumers are more interested to purchase the products of WalMart, owing to its low market prices and special price discount programs. If it is assumed that the company would increase its product and service prices by almost 5% on average, then its market demand would surely fall by equal or more than 5%. Therefore, the company faces a relatively elastic demand in the industry. Figure 5: Relatively Elastic Demand Curve (Source: Mankiw, 2011) The above graph indicates the relatively elastic demand curve of WalMart. Resource and Product Market In the current era, the retail industry has become highly concentrated with a handful of giant retailers. The excellent merchandising, targeted pricing and rewards programs of giant vendors, like, WalMart, has generated conditions, where the product manufacturers or suppliers need the assistance of retailers. For example, sales of WalMart, in the year 2007, were 4.5 times more than its largest supplier, Procter & Gamble (Dawar & Stornelli, 2012). The resource and product market relations of WalMart are excellent, given that the company has claimed to follow The Margin Model in business. Under the regime of this business model, the company has reduced the role of intermediaries in business. This is done in order to reduce overall costs in product supply deals. Researchers claim that the company acts as a monopsony capitalist in the industry. The product and resource suppliers of the company enjoy low bargaining power in the local economies because WalMart is the largest buyer (of the supplier’s resources and products) in these marketplaces. Problems in WalMart There are lots of problems that are created by the company of WalMart in the local economies. These are: The competitive powers of small scale retailers in the local economies have fallen and this has forced these firms to lower their employment opportunities. The overall spillover effect in nearby shopping destinations of WalMart stores have significantly fallen. The loss occurring in small competitive retail firms in the local economies has lowered sales tax revenues of the local governments. The overall demand for publicly provided fire, police and waste management services has remarkably increased as WalMart stores create large amount of unsustainable wastes. Such problems created by the operations of WalMart in local economies can be eradicated with the use of certain specific strategies. The governments of local economies must impose higher progressive tax rates on WalMart’s profits for the purpose of compensating the losses in revenues. The small scale retailers should be bestowed with greater power and subsidies in the local economies. Through the abovementioned strategies, the local governments should be able to augment the level of competition in the retail industry across local economies, thereby ensuring higher producer and consumer surplus in the market. International Economy The company of WalMart operates in nearly all major economies in the world. However, it is found that in recent years, the company has decided to lower the scale of its operations in China and Brazil. The company has also claimed to close its joint venture with Bharti Enterprise Ltd. in India and has decided to independently enter the Indian market, owing to of the presence of several regulatory problems in the country (Banjo, 2013). Due to recessionary trails, business of the company in Canada, Japan, Central America and Mexico have incurred significant losses. Nonetheless, the company forecasts to experience higher e-commerce sales in the coming years (Banjo, 2013). Conclusion From the above analysis, it would be correct to conclude that the company of WalMart is experiencing strong market power in local economies. With the essence of strategic pricing and marketing tools, the company have successfully lowered its product prices and augmented its sales in the local economies. Even so, the firm’s competency in these economies has lowered the business shares and profitability of other small scale retail firms. The employments and taxable revenues generated by these firms have also fallen significantly, over time. Hence, the local governments of these economies must try to enhance the level of market competition in the retail industry in order to ensure higher net social welfare. Finally, the context of the paper also shows that WalMart’s business strategies are substantially affected by the changes in the external world (Frumkin, 2006). References Banjo, S. (2013). WalMart Retools International Strategy. The Wall Street Journal, 15 October. Dawar, N. & Stornelli, J. (2012). Rebuilding the Relationship between Manufacturers and Retailers. Retrieved from http://sloanreview.mit.edu/article/rebuilding-the-relationship-between-manufacturers-and-retailers/. Foster, J. B., McChesney, R. W. & Jonna, R. J. (2011). Monopoly and Competition in Twenty-First Century Capitalism. Retrieved from https://monthlyreview.org/2011/04/01/monopoly-and-competition-in-twenty-first-century-capitalism. Frumkin, N. (2006). Guide to Economic Indicators. New York: M.E. Sharpe. Mankiw, G. N. (2011). Principles of Economics. Connecticut: Cengage Learning. Renkow, M. (2005). WalMart and the Local Economy. NCCES. Retrieved from http://ag-econ.ncsu.edu/sites/ag-econ.ncsu.edu/files/economist/2005/novdec05.pdf. Tucker, I. B. (2010). Survey of Economics. Connecticut: Cengage Learning. Read More