by Michael Visser

Created on: May 14, 2009

I am an economist and have published an academic research article on big-box retailing, though I won't claim to know everything there is to know on the subject.

Big-box retailers, like Wal-Mart, result in lower prices than smaller retail outlets. This is good for consumers. At the same time, it is bad for competitors, who must lower prices their own prices in order to continue to make sales. Some of these competitors will not be able to compete with the big-box retailer's lower prices. The big-box ordinarily is able to sell at a lower price due to economies of scale. So, some of the other retailers will be driven out of business. This may or may not be bad. If they are simply not as efficient as the big-box retailer, then this is good, as it reduces the resources required to produce the goods that consumers want. This is a natural result of ordinary competition. If the other retailers actually provide a superior product ON A COST-ADJUSTED BASIS, then this may not be so good for consumers, as they will lose some degree of consumer choice. (To just say that Wal-Mart produces low quality stuff compared to other retailers isn't an appropriate comparison; it's like comparing apples to oranges. One must compare them on a resource requirement basis.)

I think that that both of these effects are happening. Big-box retailers do drive down prices for all retailers, and that is unambiguously good for consumers. Some other retailers are being driven out of business; some of that is good, but some of it is not. However, some of the other retailers continue to thrive because some people prefer not to shop at the big-box retailer. There is nothing wrong with that. There are benefits for everyone from lower prices, as even the remaining local retailers will have lower prices than without the big-box retailer. So, it is clear that all consumers benefit from the presence of a big-box retailer, and my published research supports that.

Where I start to worry about big-box retailers, and where my research doesn't provide any significant insight, is how input markets are affected. Anecdotally, big-box retailers tend to provide a lot of jobs, but may not provide very high-paying jobs. Wal-Mart, for example, is known to vigorously resist employee attempts to unionize. I am no great fan of unions, but the lengths to which Wal-Mart goes in resisting doesn't pass my smell test. Other big-box retailers, like Costco for example, do tend to provide pretty good jobs, so I am careful not to overgeneralize here.

My biggest concern with big-box retailers is in the wholesale markets for the retail goods themselves. Because big-box retailers are so large, they command a great deal of buying power. This is a lot like market power due to monopoly, except on the buying side of the market. This gives them a great deal of ability to dictate terms in wholesale markets, and that has the ability to be just as bad as monopoly.

Academic research on the input side of big-box retailing is not far enough along to know whether the negatives due to buyer power are sufficiently large to offset the benefits of low prices. In general, I suspect that they are not, but there may be individual cases where they do. Time, and some good research, will tell.

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