Is Wal-Mart a Monopoly?
The $602 billion grocery stores and supermarket industry in the US comprised of 42,539 businesses and employed an estimated 2.62 million people in 2016. The top four firms i.e. Wal-Mart, Kroger, Costco, and Safeway, controlled 37.6% of the total market share (Statista, 2015; IBISWorld, 2016), which when given the total number of businesses in the industry points to a highly concentrated monopolistically competitive output market structure as against a monopoly structure. Other leading players in the industry include Publix, Albertsons, H-E-B, Whole Foods Market, and Target, which controlled 4.3%, 3.9%, 3.4%, and 2.2% of the market, respectively, while the remaining small and medium-sized firms that mainly cater for local and regional markets only accounted for less than 0.1% of the market share, each. Wal-Mart is easily the largest player in the industry, accounting for about 25% of all sales (IBISWorld, 2016; Statista, 2015).
There are other characteristics of this industry that point to a monopolistic structure as against a monopoly. To begin with, while most of the products of the products sold are undifferentiated, there is an increasing number of nationally recognized and private label merchandise in multiple categories, including hardlines, entertainment, health and wellness, grocery, and apparel. Brand loyalty, well-established retail network, low-cost market leadership, and wide selection of products has the effect of differentiating Wal-Mart’s products as well as those of its similarly large competitors, with the consequence of insulating them from direct competition. Effectively, Wal-Mart does not face a perfectly elastic demand curve, and it can increase prices without losing all its sales, and in fact, its cost leadership strategy does not translate to a loss. There is also some evidence of a monopoly or an oligopolistic structure. For instance, the high capital requirements are requirements to establish similarly extensive retail, networks in the country bar smaller competitors from competing effectively, and while there is relatively perfect information about most products/prices, there is considerable strategic interdependence among major players that is reflected in their prices, promotional activities, advertising, and product range.
The fact that Wal-Mart controls a quarter of the US supermarket/grocery store industry accords it considerable market power, relative to its suppliers. If any individual supplier is locked out of Wal-Mart, they are effectively locked out of a sizeable chunk of the market, which is why the company can set factor prices. Wal-Mart uses this power by varying its floor space allocations for different product and setting lower prices for inputs. The company has variously been involved in lawsuits for (or faced allegations of) violating federal minimum wage and overtime laws/regulations, sourcing from sweatshop operators in low income countries, and setting high barriers for suppliers. As a quasi-monopsony in the factor market, Wal-Mart maximizes profit at the point where the marginal factor cost (MFC) is equal to the marginal revenue product (MRP). However, if Wal-Mart is to increase its demand for factor such as labour, it has to extend similar prices to its existing suppliers, which implies that its MFC are higher than the market-determined marginal cost of labour. Effectively, Wal-Mart actually employees fewer factors, but given the downward-sloping factor supply curve, it pays them a lower factor price, resulting in monopsonistic exploitation. However, given the downward sloping demand curve for a monopolistically competitive firm, there is also some measure of mo (McGlasson, 2013)
Figure 1: Monopolistic and monopolistic exploitation (McGlasson, 2013)
As shown in Figure 1, for a single factor (labour), Wal-Mart pays w* and employs l*, which are both lower than the market-determined levels (intersection of VMP=SL) resulting in both Monopsonic and monopolistic exploitation (McGlasson, 2013).
References
IBISWorld. (2016). Supermarkets & Grocery Stores in the US: Market Research Report. New York: IBISWorld.
MarketLine. (2015). Wal-Mart Corporation: Company Profile. New York: MarketLine.
McGlasson, M. J. (2011, July 11). Episode 29: Monopolistic Competition. Retrieved from https://www.youtube.com/watch?v=T3F1Vt3IyNc
McGlasson, M. J. (2013, April 23). (THE LOST EPISODES): Monopsony Factor, Monopoly Output . Retrieved from https://www.youtube.com/watch?v=3V08bP0vk5I&list=PL336C870BEAD3B58B&index=44
Statista. (2015, June 11). Market share of the leading grocery retailers in the United States in 2014 . Retrieved from http://www.statista.com/statistics/240481/food-market-share-of-the-leading-food-retailers-of-north-america/
