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The WalMart Prices: Implications and Explanation :

The WalMart Prices: Implications and Explanation Alice Nakamura (University of Alberta) Leonard Nakamura (Federal Reserve Bank of Philadelphia) Marc Prud’homme (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 .

Overview:

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?

What is WalMart’s impact on productivity?:

What is WalMart’s 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?

McKinsey: Yes, WalMart is crucial:

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.”

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

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

Slide 6:

US Data on WalMart and General Merchandise Retail Employment and Sales WalMart Percent of General Merchandise retail sales WalMart, Percent of General Merchandise payroll employment 1977 0.7 % 0.54 % 1987 8.3 % 4.26 % 1997 29.4 % 18.1 % 2007 39.2 % NA

Slide 7:

Retail productivity, US, real retail sales per worker: General Merchandise Stores and WalMart, 1982-2002 Basker data GM, WalMart GM ex WalMart Ratio WalMart to GM ex WalMart, 1982 134.4 148.5 134.1 1.11 2002 191.4 256.2 161.4 1.59 growth rate 1.7 % 2.7% 0.9 %

Our preliminary work:

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)

Distance and WalMart store openings:

Distance and WalMart store openings As Holmes has shown, WalMart’s 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 WalMart’s entry. Regressing year of WalMart entry on centroid distance from Arkansas has an adjusted Rsq of .87.

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):

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)

Cumulative WalMart store openings usually plateau in a state after about 15 years: Create an average WalMart time profile of entry for instruments:

Cumulative WalMart store openings usually plateau in a state after about 15 years: Create an average WalMart time profile of entry for instruments

Create an instrument for each state:

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

US result:

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)

Estimation results:

Estimation results

In Canada, WalMart entered by acquisition:

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. Haven’t come up with good instrument, using lags of store openings as instruments

Canada :

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

Conclusion:

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

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