Wal-Mart, private labels, strategic reactions, Agricultural and Food Policy, Demand and Price Analysis,

Chavas, Jean-Paul

Cleary, Rebecca

English

Research Papers in Economics

 
 
WAL-MART, PRIVATE LABELS, AND  
SUPERMARKET MILK PRICES 
 
 
 
 
 
 
Rebecca Cleary and Jean-Paul Chavas 
Authors are respectively Ph.D. student and Professor at the University of Wisconsin-Madison 
Contact: becky.cleary@gmail.com 
 
 
 
 
 
 
 
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010 
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010 
 
 
 
 
 
 
 
 
 
 
 
 
 
Copyright 2010 by Rebecca Cleary and Jean-Paul Chavas. All rights reserved. Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided that this 
copyright notice appears on all such copies. WAL MART, PRIVATE LABELS, AND  MART, PRIVATE LABELS, AND 
SUPERMARKET MILK PRICES SUPERMARKET MILK PRICES
` `
Rebecca Cleary and Jean-Paul Chavas
Department of Agricultural and Applied Economics, University of Wisconsin, Madison
contact:  becky.cleary@gmail.com
¾ Barnes et. al. (1996) found that, as Wal-Mart entered food retailing, stores in the northeast 
often fared better than their counterparts in the south, since the northern food retailing 
market is more competitive.
¾ Wal-Mart first began food retailing with its Supercenter format in 1988 in Washington, MO; 
Wal-Mart     brought its Supercenter format to Dallas/Fort Worth in 1995 (Market Scope, 
1994).
¾ Hausman and Leibtag (2006) conclude that not only do Wal-Mart-like stores significantly 
lower prices, but also that prices change because households change their purchasing 
behavior, seeking convenience.  
Why Dallas/Fort Worth?
¾ Southern location– southern stores are impacted more heavily by mass 
merchandisers (Barnes et. al. 1996)
¾ top two players in this market are also the top two players nationally:  
Albertsons and Kroger
Existing theories about the odd pricing behavior:
¾ a price war where some retailers were charging below the farm price —
maybe they feel threatened by a powerful entrant like Wal-Mart  (Cotterill and 
Brundage, 2001)
¾ cost and demand shocks give incentives for firms to collude in some 
periods and defect in others (Kim, 2000)
WAL-MART INNOVATES IN FOOD-RETAILING SECTOR
THE DALLAS/FORT WORTH MILK MARKET HAS 
NON COMPETITIVE CHARACTERISTICS
NESTED LOGIT DEMAND WITH PRICE REACTIONS
CONCLUSIONS
¾ Wal-Mart Supercenters decreases the non-competitive behavior of 
the top three players in the market while having no significant effect on 
the price reactions of smaller players
¾Wal-Mart increases the substitutability of incumbent retailers and 
brands sold at incumbent retailers
¾Traditional-retailer consumers become more price sensitive with the 
entry of Wal-Mart Supercenters
¾Wal-Mart Supercenters decreases the overall share of incumbent 
retailers in the retail fluid milk market
1.00
1.50
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3.50
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p
r
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(
$
/
g
a
l
l
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n
)
Winn Dixie
Tom Thumb
Minyard
Albertson’s
Kroger
Raw milk
SUPERMARKET MILK PRICES IN 
DALLAS/FORT WORTH
¾ Core data are from the Information Resources Incorporated-Infoscan (IRI) database provided by the Food 
Marketing and Policy Center at the University of Connecticut:  58 four-week-ending (henceforth, monthly) 
observations (March 1996 - July 2000) in the metropolitan statistical area of Dallas/Fort Worth
¾ Input prices (raw milk, energy, retail wages) were obtained from publicly available sources. 
¾ The annual number of Wal-Mart Supercenters in Dallas/Fort Worth is from Market Scope and the monthly   
number of openings was inferred using the entry strategy revealed by Sam Walton (Wal-Mart founder) in 
his autobiography.
¾ The system of a demand equation and first order condition for pricing is recursive, non-linear in     
parameters, has a cross-equation restrictions, and is estimated using the generalized method of     
moments (GMM) technique. 
UNIQUE IRI PANEL DATA FROM FMPC, GMM ESTIMATOR
¾ Retailers may be using their Private Label milk to retain consumers when Wal-Mart    
Supercenters entered the area, National Brand may not be able to respond as quickly
¾ National Brand milk, being sold at both incumbent retailers and Wal-Mart Supercenters
may have an incentive to differ in its strategic response than Private Label milk
DO RETAILERS CHANGE THEIR STRATEGIES 
AFTER WM ENTERS?
DOES PRIVATE LABEL MILK RESPOND DIFFERENTLY THAN 
NATIONAL BRAND MILK TO WM’S ENTRY?
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Mar '96
Apr '96
Jun '96
Aug '96
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National Brand price
Private Label price
Raw Milk price
PARAMETER ESTIMATES
0.00 -0.05 11.54 -0.01 -0.74 -18.84 National Brand Winn Dixie
-0.01 -0.22 8.73 -0.05 -1.81 -14.26 National Brand Tom Thumb
-0.03 -0.53 2.29 -0.10 -0.21 -3.73 National Brand Minyard
-0.01 -0.06 10.23 -0.02 -0.61 -16.71 National Brand Kroger
-0.02 -0.18 7.49 -0.07 -0.17 -12.23 National Brand Albertsons
-0.03 -0.66 0.22 -0.10 -2.25 -0.36 Private Label Winn Dixie
-0.04 -0.56 1.27 -0.15 -1.90 -2.08 Private Label Tom Thumb
-0.01 -0.25 4.57 -0.05 -0.84 -7.46 Private Label Minyard
-0.05 -0.54 0.28 -0.20 -1.83 -0.45 Private Label Kroger
-0.05 -0.40 0.73 -0.23 -1.61 -1.67 Private Label Albertsons
θJ θj|J θi|j θJ θj|J θi|j PRODUCT CHAIN
With Wal-Mart Without Wal-Mart
RESIDUAL DEMAND ELASTICITIES
0.1347 0.499 -0.74742 φ15
0.1268 4.9943 7.635094 φ05
0.3902 0.2475 -0.21281 φ14
0.388 1.9811 1.711198 φ04
<.0001 0.0236 -0.09294 φ13
0.0011 0.1833 0.600873 φ03
<.0001 0.0144 -0.09141 φ12
<.0001 0.1026 0.469405 φ02
<.0001 0.0225 -0.12407 φ11
<.0001 0.1727 0.827521 φ01
<.0001 0.000458 0.007592 σ1J
<.0001 0.00199 0.027052 σ0J
<.0001 0.00099 0.029935 σ1I
<.0001 0.0169 0.764938 σ0I
<.0001 0.0074 0.066399 α1
<.0001 0.104 0.998368 α0
<.0001 0.0216 -0.19365 δ
P-Value Standard Error Estimate Parameter
¾ Need to determine a measure of heterogeneity between brands and retailers and if this 
measure changes with the number of Wal-Mart Supercenters in the area
DO CONSUMERS THINK TRADITIONAL RETAILERS AND MILK 
BRANDS ARE MORE SIMILIAR AFTER WM ENTERS?
BUY MILK FROM 
INCUMBENTS
BUY FROM OUTSIDE OPTION: 
WAL-MART, GAS STATION, ETC.
ALBERTSON’S KROGER MINYARD TOM THUMB WINN DIXIE
PRIVATE 
LABEL
PRIVATE 
LABEL
PRIVATE 
LABEL
PRIVATE 
LABEL
PRIVATE 
LABEL
NATIONAL 
BRAND
NATIONAL 
BRAND
NATIONAL 
BRAND
NATIONAL 
BRAND
NATIONAL 
BRAND

Wal-Mart, Private Labels, and Supermarket Milk Prices

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