Regional Competition, "Big Box" Entry, and Regional Welfare: Theory and Evidence.
Proulx, Kevin B.
- I use a spatially differentiated model similar to that of Salop (1979) and modified more recently by Norman, Pepall, and Richards (2008) to model local retail competition and to analyze the welfare implications of later entry by a cost-advantaged "fast second" meant to be a large "big box" firm such as Wal-Mart or Home Depot. I show that when the market is contestable the local welfare remains ... read moreunchanged in the wake of a big box firm's entry. In contrast, when the market is incontestable, local welfare decreases in the wake of big box entry due to a decline in both consumer and producer surplus. In both cases though, the global surplus always increases. The before- and after- big box entry comparison of local welfare will hold for any symmetric equilibrium whether local firms are forward-looking and anticipate the later big-box entry or myopic, as I assume. Under the myopic assumption however, local retail entry is excessive relative to the optimal case. Therefore, since the anticipation of the "big box" firm's later arrival would depress this excessive entry, that welfare conclusion does not necessarily mean that big box entry should be blocked. Instead, the first-best solution would be a tax-and-transfer scheme that recognizes that "big box" entry is welfare-enhancing globally and then makes sure that everyone benefits. If such a policy is not possible however, then legislation to prohibit "big box" entry may be a sensible second-best policy for regions facing that prospect. A major implication of my analysis is that local retail firms will exit at the time of the big box firm's entry. It is this loss in competitive pressure that could make local consumers as well as local producers worse off. I test this implication using panel data from 1977-92, along with both a fixed-effects and Instrumental Variables (IV) approach to test the impact of Wal-Mart's entry into a regional market on the number of retail firms operating in that market. As predicted, the number for local firms always declines noticeably in the wake of big box entry.read less