Supermarket and Consumer Responses to Superstore Expansion

This dissertation examines the impact of superstores, such as Wal-Mart Supercenters (WMS), on competing supermarkets and consumer preferences via three essays.;The first chapter examines the impact of WMS on supermarkets' strategic use of private labels and the control they may exercise over the pricing of manufacturer brands. It develops a structural model to investigate alternative pricing scenarios in which the supermarkets have varying control over manufacturer-brand retail prices. The analysis is applied to the milk market in the Dallas/Fort Worth metroplex. I find that Wal-Mart induces supermarkets to price their private label more competitively and induces the manufacturer to become more responsive to price changes. Consumers that continue shopping at traditional supermarkets are found to be less price-sensitive and value private label or store brands more than the manufacturer brand.;The second chapter develops a conceptual model of the consumer value of consumption externalities and preference complementarities and illustrates their significance in an application to grocery-store outlet choice. Consumption externalities arise when the choices of others have an effect on the value of a household's purchases; preference complementarities arise when the choices of others have an effect on the marginal value of a household's purchases. I propose empirical measures of the value of consumption externalities and preference complementarities based on the benefit function. The results show that, in the long-run, superstores exhibit negative externalities and do not exhibit complementarity while purchases elsewhere exhibit positive externalities and do exhibit complementarity.;The third chapter uses a structural model to examine the pricing behavior and promotion responses of incumbent supermarkets to a rapid expansion of Wal-Mart Supercenters (WMS) using the Dallas-Fort Worth milk market as a case study. Empirical results verify that WMS' expansion disciplines incumbent supermarkets by decreasing oligopoly power and numbing consumer responsiveness to promotion. In addition, WMS' expansion lures away price-sensitive consumers, leaving incumbent supermarkets to face more price-inelastic but lower demands for milk.