A Wal-Mart as a Monopoly - Case Study Example

TOPIC WALMART AS A MONOPOLY Introduction Wal-Mart is one of the biggest corporations in the world, with more than 5000 stores worldwide. The group is the largest employer in the United States. Wal-Mart is also synonymous with lower prices. The chain has been constantly studied for its impact on the local economies. Research has suggested that the presence of Wal-Mart affect the performance of local retailers, forcing them out of the market, and effectively making Wal-Mart a monopoly in each market. But there has also been a rethinking in the Competition policies of many countries, which makes an international expansion for a group like Wal-Mart possible. Growth accelerated by takeovers and buyouts of other retail chains also fuel the power of the corporation to grow bigger. The study analyses three articles on Wal-Mart to assess their role in various economic scenarios. Summary of Article # 1 Author: Stone, Kenneth E. Title: Impact of Walmart Phenomenon on Rural Communities Source: Increasing understanding of public problems and policies-1997 Date 1997 The author contends that a rural community where Wal-Mart has entered has had adverse effects. Wal-Mart is another stage in a long process where the retailers business has shifted from the local stores. Sears catalog was one, increased prevalence of the automobile giving access to local towns was another. The shopping malls changed the way America shopped. In the 1960s discount supermarkets made their entry, including among them Wal-Mart. Wal-Mart's strategy was to open a large store in a small town, within easy distance of its distribution centers. It took them 30 years to go national. The author has studied Wal-Mart and its impact extensively to devise strategies for his clients, Iowa retailers. The study has spanned 34 towns in Iowa, all of which has had a Wal-Mart store for at least 10 years. General merchandise stores in towns with no Wal-Mart suffered immediately when Wal-Mart opened. It is generally believed that people in towns with no Wal-Mart traveled out to towns that did. The effect has also been seen on eating and drinking places, which had been more frequented in Wal-Mart towns. Home furnishing sales in non Wal-Mart towns declined. The study has also unearthed that stores carrying similar lines as merchandise stocked in Wal-Mart, probably loses sales. Apparel sales in other stores fell by around 28% in the year in which Wal-Mart opened in a town. Retailers in Smaller towns with less than 5000 population lost most when a Wal-Mart opened. Vermont state officials had tried to keep Wal-Mart away to protect its small traders, but found that the entire sales shifted to New Hampshire and New York where Wal-Mart opened. The author concludes that loss of retail trade for small stores has accelerated in the past two decades. The author then proceeds to suggest a few ways in which retailers can coexist with Wal-Mart. They include stocking merchandise lines, which Wal-Mart does not handle, handle complementary merchandise, go for upscale merchandise etc. A better customer profiling, extended working hours, no hassle return policy etc, special order capability which large discount supermarkets don't possess etc are essential. Summary of Article # 2 Author: Hallsworth, Alan and Evers, David Topic: The steady advance of Wal Mart across Europe and changing government attitudes towards planning and competition. Source: Environment and Planning C: Government and Policy 2002, Volume 20, pages 297-309 Date 2002 The authors focus on retail internationalization and the ability of EU states and their regulatory mechanism to handle the same. Since 1994, the Wal-Mart format has been creating a systemic change in the retail environments of a number of countries. Planning regulations in many countries are at odds with other policy developers who look forward to encourage competition in order to develop national competitiveness. Netherlands had a tight policy against big box development, but consequent policy decisions could make the market a lot more interesting for Wal-Mart. The author contends that Wal-Mart grew this big because in United States the competition policy is no longer strictly adhered to. Similarly in Britain and Netherlands the policy is far more lenient towards retail consolidation and domination than other countries. The apparent ease with which Wal-Mart took over the Canadian market could have spurred its international expansion plans. In Canada, Wal-Mart bought over the Woolco stores and established presence, and before the planning system could intervene, the chain had stores across the country. The Wal-Mart group went ahead with a full-fledged price war at the end of which they had become the market leaders. In Germany, the local authorities have more power to decide on land allocation. Theoretically it is tough to get permissions for a big box development, but as local bodies often decide otherwise, especially to put into use defunct industrial sites. Walmart has in many instances brought over stores in Germany, though they still have a very small presence in the market. The practices of the group like pricing at cost or less has also brought it under the radar of regulatory authorities. In Britain, Wal-Mart took over the Asda stores. In UK, there has been a distinct tightening of the land use policy. But Asda had a large number of permissions in different towns that they had not been able to put to use because of financing issues. Wal-Mart immediately announced expansion plans on them. The two major entry-points for Wal-Mart in international markets was land availability and chains open to a takeover. Market leaders in other markets could preempt the move by taking over susceptible chains and buying out attractive sites. Government thinking in many EU countries seems to be confused, on one hand objecting to big box development as an environmental hazard, and on the other welcoming retail shake up as a market development tool. Summary of Article # 3 Author Hicks, Michael J Title Estimating Wal-Mart's impacts in Maryland: A test of identifications strategies and endogeneity tests. Source Eastern Economic Journal, 2008, 34, (56-73) Date 2008 The author analyses the impact of Wal-Mart's entrance in Maryland. The ubiquity of Wal-Mart has in fact spurred many research studies especially on local economic conditions. The central question, which the author looks at, is the problem of endogeneity within Wal-Mart's entrance decision. Estimates of Wal-Mart's impact have to be separated from growth that is already occurring, or would have occurred in the region irrespective of the presence of the retailer. The author evaluates endogeneity and treats it econometrically. The author evaluates various studies that have taken place and comments that the theoretical treatment of Wal-Mart in all of them have been heuristic. He outlines that studying the change in the consumption pattern following Wal-Mart's entry could offer divergent results. The three description presented are: A. If Wal-Mart enters a market with lower prices, then there will be more income available for the consumers to spend on goods, leading to higher employment and income. B. If Wal-Mart enters a market and attracts a cluster of retailers, then there would be considerable cross-county shopping, thereby reducing the retail employment in neighbouring towns, and increasing the same in the town with Wal-Mart. C. Wal- Mart's documented increase in labour productivity should decrease employment levels. The three results indicate and the influence of time and place on the study could offer different results to different researchers, though methodically they may be identical. If for example, Wal-Mart plans to enter a town, which is already growing, then its impact on retail employment could be over stated. Research suggests three alternatives, including studying the general prosperity levels of the county, measurement of a lag between announcement and opening of a Wal-Mart store, third approach looks at a Wal-Mart location as a function of time/distance function of the store from the corporate office. Each of them has its limited effectiveness. The author proposes a regional income variable, which is a variable for each county. Maryland's 23 counties were studied from 1988 to 2003. The econometric model employed by the author provides a treatment model approach to estimate Wal-Mart's impact. The dependent variable is estimated through county fixed effects, an intercept, an exposure variable and a one period auto regressive component. The author also uses three instruments which have been checked before, as well as a new instrument. They include an endegeneity test, a time distance instrument, a planned entrance instrument as well as a market share instrument. Based on these models, conclusions are arrived at for the impact of Wal-Mart's entrance on total retail employment and wages at country level. Productivity gains were modestly suggested on detailed analysis, after the entry of Wal-Mart. Net employment rates had no impact after the entrance of Wal-Mart. In rural counties, average wages increased after Wal-Mart opened. So while retail jobs may disappear, aggregate employment remains the same, and this has relevance for policy makers. Analysis based on the Text Book We assume that a monopoly situation implies an ability to command premium prices. Wal-Mart in a conventional analysis will show that exists on its ability to provide lower prices. If we were to refine the proposition to profitability, then we may be able to understand the power of the supermarket chain as a monopolistic power in many markets. For a monopoly to survive, the market must be closed in some way, either by legal means or by some strong entry barriers. The chief advantage that Wal-Mart enjoys is its strong economies of scale, which allows it to buy directly from producers and eliminate middlemen. The sheer volume it trades affords the chain the ability to offer market prices below any other competitor, thereby effectively eliminating a competitor, and consolidating its market superiority. Another advantage that a monopoly enjoys is the advantage of spreading a resource over a larger base. Advertising for example is a good example. The cost of advertising remains the same for a larger and smaller group. But as the larger group can benefit on a larger set of product lines, the cost per product becomes lower for the group. Thereby, advertising or any other such resource expenditure is costlier for the smaller group. Opinion formed on the basis of the study Analyzing Wal-Mart as a monopoly, one of the key variables that can be studied on substitution. Monopoly power depends on the number and strength of substitution (Karier, 6). The key argument that has been used against Wal-Mart is how it makes substitutes irrelevant or less powerful with its entry. In the papers that have been evaluated it has been found that there a set of variables that impact the retail industry other than Wal-Mart. In rural counties without Wal-Mart, the opening of a store in an adjacent county makes the traditional retailers in the county week. But new stores and specialty stores open in the county with Wal-Mart, making it an interesting aspect of market development. Wal-Mart also increases its monopoly powers when retailers carry product lines different from what Wal-Mart stocks, thereby giving them a sole leadership role in the market. A firm can enhance its monopoly power by reducing the strength of its substitutes. Buying out competitors is a fast method of accomplishing the same. Wal-Mart's European strategy is indicative of this. A good indication of economic policies in European and American markets can be seen with the changes in its competition policies. The competition policies in these countries have traditionally been supportive of the smaller stores. They have been against the power of monopoly represented by chains such as Wal-Mart. But new policy makers in larger interests of enhancing their economies are no longer in favor of protective policies, studies have also suggested that the presence of a large store does not affect the overall economy of the town either. The resultant increase in the overall wage positioning will also negate policy objections. The cost leadership role taken by Wal-Mart is achieved through low cost of production, higher productivity, better supply chain management, better distribution and optimum resource allocation. The near monopoly situation in many markets give the group the ability to invest in strategic assets that can create more entry barriers for competition. The large capital expenditure necessary to create a system that can meet Wal-Mart prices also creates an effective entry barrier. Citation Karier, Thomas "The Microeconomics of Monopoly Power" Working paper No.36, Jerome Levy Economics Institute, Bard College, April 1990. 1-29. Viewed 1 December, 08 http://www.levy.org/pubs/wp36.pdf Read More