The Evolving Food Chain: Competitive Effects of Wal‐Mart's Entry into the Supermarket Industry

We analyze the effect of Wal‐Mart's entry into the grocery market using a unique store‐level price panel data set. We use ordinary least squares and two instrumental‐variables specifications to estimate the effect of Wal‐Mart's entry on competitors' prices of 24 grocery items across several categories. Wal‐Mart's price advantage over competitors for these products averages approximately 10%. On average, competitors' response to entry by a Wal‐Mart Supercenter is a price reduction of 1–1.2%, mostly due to smaller‐scale competitors; the response of the “Big Three” supermarket chains (Albertson's, Safeway, and Kroger) is less than half that size. Low‐end grocery stores, which compete more directly with Wal‐Mart, cut their prices more than twice as much as higher‐end stores. We confirm our results using a falsification exercise, in which we test for Wal‐Mart's effect on prices of services that it does not provide, such as movie tickets and dry‐cleaning services.