Are Wal-Mart’s Products Normal?

Emek Basker is an incredibly creative (and under-appreciated) industrial organization economist. She is also surely the leading Wal-Mart-ologist, and has been studying big box stores for several years.

Her most recent piece provides a very nice teaching example highlighting the importance of the income elasticity of demand; she also managed the perfectly accurate but cheeky turn of phrase that we all dream about sneaking into an academic paper:

In this note, I estimate the income elasticity of revenue for Wal-Mart and Target over the last ten years. Because some consumers are likely to view each discounter’s products as normal while others view them as inferior, the aggregate relationship could go either way and depends on the size of the two groups as well as on the magnitude of their elasticities of demand (positive and negative).

I find that demand for Wal-Mart’s products exhibits a negative income elasticity and Target’s demand exhibits a positive income elasticity … For the average consumer, then, it appears that shopping at Target is perfectly normal, but shopping at Wal-Mart is not.

Given these findings, perhaps Rob Jensen‘s Giffen good expedition team needs a Wal-Mart-ologist.

Oh, and in case you are wondering how Target and Wal-Mart are doing, here are their latest stock price movements:

Stock Prices

Given Basker’s estimates, it is probably no surprise that the current slowdown is good news for Wal-Mart, but bad news for Target.

It turns out that Basker’s findings are no surprise to Wal-Mart: In October 2007, CEO Lee Scott argued that “Our low prices and low-cost business model should give us an advantage over other retailers if things get more difficult for consumers.”

Her full paper is here.

(Hat tip: Free Exchange.)


Emek Basker

Ben (12:32pm) and Mike (1:24pm): Yes, it's about perception-- if you think one brand of yogurt tastes better than another then, to an economist, it IS better (even if a blind taste test would say otherwise). The definition of an "inferior good" in economics is a good you buy less of as your income increases (or more of as your income falls), so it's about what you DO, which is driven by your perception. It also doesn't matter whether Wal-Mart wants it to be this way (the "business model" explanation) or not; the observation is about consumer behavior, not about the cause of this behavior (which is interesting to speculate about).

You can find the paper here.

Mike

I just had another comment, and this will determine how well I really do understand this post.

Is in necessarily about the "perception" of the products they sell? Can't it be the business model? Let's say Target's business model is such that they do best at a certain volume of normal goods and a certain volume of inferior goods. WalMart has a slightly different business model that (thanks to their distribution chain, marketing strategy, etc.) does well with different volumes of normal and inferior goods. Wouldn't that explain the data? Did they compare actual products sold by the two retailers, or just the sales numbers? Since the paper isn't posted, does anyone know the answer? Can we get a follow-up? (Written for the layperson)

John

Did you ever notice that many of the name-brand products found at Wal-Mart are specifically made for Wal-Mart. I mean, they say, "manufactured for Wal-Mart" on the label.

I suspect (but don't know) that these units are specific sizes that produce higher margins. Like 90% the size you'd find at a regular grocer, but priced at 95% the regular grocer. Thereby giving the shopper the impression that the unit prices are lower.

mike

You know, Freakonomics was written for the average (if intellectually interested) Joe who hasn't done graduate work in economics. This post, however, is not. While I think I understand it fairly well, I have to say, my meta-comprehension is low.

This seems interesting enough that it should be written with the non-economist in mind. Please do.

M Todd

If Rain man was remade he would say "Walmart underwear sucks" since Walmart has replaced Kmart as the quintessential "discount store".

I do not shop there for two reasons, first they built their business on destroying the small town main street, and second I cannot get the image of people trampling each other for a 20 dollar DVD player.

Walmart exists because in this country the idea of decent jobs, a fair price, each taking and giving back in society has been replaced with mass consumption and who cares about our manufacturing base as long as we can save 25 cents on a product made in China. Only to take that 25 cents saved and blow it on a Hanna Montana combination flashlight/bottle opener at the checkout counter.

Bob Calder

Wal-Mart could crank it up a bit by adding a Pawn Shop section.

Seriously.

scott

I hate Wal-Mart. Have not shopped there in years. They have low prices which may be good for their low income shoppers, but they also destroy communities---low prices are fine, but at the expense of running all the small business owners out of town? A questionable trade-off. And the blight on the local communities as the build and rebuild and rebuild within blocks of the original store, leaving behind the old empty buildings....

Mac

Hm. The title of the paper is "Does Wal-Mart Sell Inferior Goods?" and it basically says that people buy more from wal-mart when they're cash-strapped?

Sounds like a candidate for the Ig Noble Prize to me: first you laugh, then you think about it. Can we use the Wal-Mart density in an area as an indicator for economic weakness?

Btw. some people here in Europe tend to believe, that the economic downfall of a district can be read off by the increasing density of tanning salons...

justareviewer

Wow,Wal-Mart elitists. Have you driven by any WM at any time of any day? The parking lot looks like most stores hope for at Christmas season. Obviously WM's business model and strategy are netting the desired results. Don't you wish your business performed as well?

Ryan

Looking over the long line of comments, I am again struck by the nonsense spouted by the Wal-Mart hating liberals. They once again make the claim that Wal-Mart destroys small businesses. So what. This is the evolution of the consumer economy not just in America, but the world. These people also tend to forget that this is not the first time this has happened. Prior to the Second World War, most Americans bought their meat at a butcher shop, bread at a bakery, vegitables and fruits at a green grocery, and canned foods at a dry goods store, or in small towns had to take what they could get at their one and only shop. The post war period saw the rapid developement of the supermarket that quickly grabbed all these small businesses' customers and they mostly all went bust. This was sixty years ago and Wal-Mart is just the next developement.They have developed a business model that has worked, continues to work well, and is being copied by many others. Get real folks. Wal-Mart doesn't do anything Target, Penneys, Lowes, or Home Depot doesn't do or wants to do.

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jimi

I hate Wal-mart.
I'd gladly go without instead of shopping there.

Melissa

Going along with shopping at Wal Mart being not normal while Target is, it seems that people think they have to shop at Wal Mart when times get hard because of percieved lower prices. However the difference between the two is not that great. Over on cockeyed.com they did a totally informal price comparison project. http://www.cockeyed.com/citizen/target/walmart_versus_target01.html The difference was only a couple of dollars when buying 20 items, and most of it came from one item.
So it seems that Wal Mart's junky atomosphere compared to Target's clean and polished one helps send more shoppers to Wal Mart because it would seem that the items in the dirty store are cheaper, even though they really arn't.

Ben

So, part of income elacticity is perception? If a consumer perceives that a certain stores products are inferior goods then they will treat them like that, regardless of whether the goods are actually inferior or not?

BT

After seeing enough Kroger/Target/Publix shoppers considering Wal-Mart and Save-a-Lot, I 'invested' in Wal-Mart, Family Dollar and DollarTree in recent months and they have all had good growth.

Christopher

It must be mentioned that many of the "name-brand" products that Wal-Mart sells are not the same product that are for sell at other stores. You may think you are getting the same product but you are, in fact, getting a cheaper version manufactured specifically for Wal-Mart with lower quality standards. There was a good article about this over at FastCompany that detailed the Snapper mower company's foray into Wal-Mart suppliership. They eventually walked away from the deal because they thought that producing an inferior Wal-Martized version of their product would dilute their brand. Fair enough.
http://www.fastcompany.com/magazine/102/open_snapper.html

Wal-Mart does offer lower prices on many goods and many of them ARE the exact same as in other stores. But don't be fooled into thinking that all of them are.

Julio

I'm glad for you Bean, but I what I really meant to find was families with 2+ children AND making less than 30K

Kinglink

I usually find myself shopping at Walmart, not because of prices, but because of convenience. I can talk myself to go to the store to pick up a new DVD, at the same time I'm able to buy food for my dog, food for myself, perhaps a new pair of pants (though rarely), and basically anything else I've been like "well I want that".

On the other hand I'd have to go to Schnuck's for the foods, Old Navy or some other clothing store (And pay way more than I think is fair), an entertainment store (again and pay way more than is fair), and anywhere else I have to go (shoe store to get Dr. Schols's, Radio shack to get a remote.)

I can do a month's shopping in about an hour, versus maybe 3 hours if I get lucky elsewhere.

I'd shop at target, I don't see it as "lesser" and I do as a second option, but to me both stores are way better than "specialty" stores that charge me 5+ dollars more for my goods because they realize they can. I choose to go to the place where I feel I get the better deal and get better convenience.

If another store opened up next to it that gave the same deals I'd have no qualms shopping there, but people ignoring a better deal on the same product because they believe it's "beneath" them always has me shaking my head. That's just my opinion.

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Maria

There is a reason that the products, even the exact same products, are cheaper at Walmart. This blog had several posts on Walmart, including May 19th, where there was discussion of some research by U. of Chicago professors (One quote from that post that is particularly relevant-- "China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result.")

Add to that aspects of their "low-cost business model," and you have a recipe for a segment of the population to resist the low-prices of a box store. Some prefer to support local business over big-boxes. Some chose good corporate citizens over those who cut corners. Take your pick, but those who make those statements probably have more disposable income and just might be after a different product (i.e. like in the May 19 post), or maybe they prefer a cleaner/neater store? It's be an interesting survey.

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Sharper

I prefer Wal-mart for their overall selection and prices. The customer service is just good enough to not make me go elsewhere.

It's just a bonus that snobby liberals and ignorant academics avoid the place. Makes for much better in-aisle conversations.

I'm thankful that the folks at Wal-mart are constantly doing their best to squeeze manufacturing and service providers on my behalf. The whole process creates tons of extra wealth for our communities in terms of efficiency and cost savings.

Tim

We shop at Wal-Mart on occassion. My wife loves it, I love the prices of food especially. It's just cheaper folks. The Target in my area has food, but their selection sucks and their price is higher.

Why I am supposed to hate Wal-Mart again?

Schnucks? I hate them the worst! My beloved high school alma mater, Mercy High School (located on the corner of Olive and Pennsylvania in University City, MO) was torn down. In it's place went a Schnucks super center. My class was the last class to graduate from there ('85). Now where the heck am I supposed to show my daughter where daddy caught an interception against Bishop DuBorg HS??? In the frickin' produce aisle? Sometimes I look at that Schnucks on Google Maps just for old times sake. (oh, and Schnucks got that land for $1, for a land swap deal from the archdiocese and the St. Louis County). Interestingly enough, they left the convent alone, now abandoned.

Sorry, got off-topic. What were we talking about?

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