The authors examine competition among the three major firms in the retail discount industry—Wal-Mart, Kmart, and Target—using two distinct, but related, approaches. They first consider a model that examines the determinants of store presence for the three chains in local markets. In each local market, each chain chooses which store format, if any, to operate. These decisions are based on the evaluation of underlying payoffs, which depend on observable and unobservable market characteristics, including the presence of competing firms. Notably, the authors allow for substantial asymmetries across firms in terms of their preferred characteristics and the impact of competition. Because each firm’s decision depends on the decisions of its rivals, the model involves a discrete game between the chains, the outcome of which determines the realized market structure. The authors use numerical techniques to characterize the equilibrium in each market and estimate the model by simulated maximum likelihood using data on market structures and characteristics for a cross-section of local markets. Thus, even without detailed store-level data, the analysis provides insight into competitive interactions among these chains. The authors then augment the analysis to evaluate the determinants of one important store-level variable that is not available—namely, store-level revenues. They posit a regression model relating revenues of each store to various market characteristics, including the presence of competing firms. Because the presence of competing stores is not randomly determined, they use the results of the initial market structure model to generate correction terms for the endogeneity of market structure.
The results illustrate several important asymmetries across the chains, many of which corroborate the conventional wisdom about positioning in the industry. From the market structure model, the authors find that Wal-Mart prefers lower-income, low-cost, family-oriented markets, whereas Target requires substantially different market characteristics, such as high income levels, to operate a store. Kmart exhibits fewer systematic patterns in the market characteristics it finds attractive, perhaps reflecting a lack of strategic focus on the part of that firm. Notably, the authors find that Kmart and Wal-Mart do not inherently differ in their ability to operate in certain markets because markets with similar sizes could support either chain as the sole operator. However, the difference between the chains arises in their vulnerability to competition: Kmart is much more adversely affected by the presence of Wal-Mart than the converse. Together, these findings suggest that Wal-Mart’s crucial competitive advantage does not lie in its ability to operate where its rivals cannot but rather in its ability to weather competition better than its rivals. The analysis of store-level revenues reinforces these findings. When the authors correct for the endogeneity of market structure, they find that Wal-Mart has a large negative effect on the store-level revenues of its rivals and that Target has a somewhat lesser effect, with Kmart trailing behind. In total, these results confirm the standard view of the industry as one in which Wal-Mart is dominant, Target serves more of a niche role, and Kmart struggles to find its footing.
Biography
Ting Zhu is Assistant Professor of Marketing in the Graduate School of Business at the University of Chicago. She holds an MS and BE in Management from Tsinghua University, as well as a PhD from Carnegie Mellon University. Her current research focuses on retail competition, pricing, and firms’ entry decisions.
Vishal Singh is Associate Professor of Marketing in the Stern School of Business at New York University. Professor Singh’s research focuses on retail competition, competitive pricing, store brands, database marketing, and empirical industrial organization. He has published articles in several scholarly journals, including Marketing Science, Journal of Marketing Research, Management Science, and Quantitative Marketing and Economics. Professor Singh received his PhD in Marketing from Kellogg School of Management, Northwestern University in 2003.
Mark D. Manuszak is an economist at the Federal Reserve Board of Governors. He received a BSFS from Georgetown University and a PhD in Economics from Northwestern University. Before joining the Federal Reserve Board, he was Assistant Professor of Economics in the Tepper School of Business at Carnegie Mellon University. His research interests focus broadly on issues in empirical industrial organization, with particular focus on pricing, retail competition, and competition policy.
Journal Marketing Research, Volume 46, Number 4, August 2009 View Table of Contents.