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Wednesday, January 25, 2006

Hausman on Wal-Mart and Welfare

Interesting...

Econ professor illustrates benefits of Wal-Mart, PressZoom: Economics Professor Jerry Hausman placed the cooling hand of numbers on ... notions about Wal-Mart's economic impact in an IAP session titled, "The Consumer Benefits From Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart," ... Hausman's ... hourlong talk ... focused on the direct and indirect effects for consumers when one of Wal-Mart's ... super centers comes to town. ... Hausman focused on ... grocery prices and shopping data for 10,000 families who buy food in Wal-Mart super centers.

The direct effect for consumers is easy to spot, he said: Wal-Mart brings in lower food prices. Cereal, for example, costs 17 percent less at Wal-Mart than at a traditional supermarket. The indirect effect of Wal-Mart occurs "even if you never enter a Wal-Mart," Hausman said, since supermarkets tend to drop their prices in competitive response to Wal-Mart's. In addition, Wal-Mart does not raise its prices after it has driven out the competition, he said. "The indirect price effect is 5 percent even if you never go into a Wal-Mart,"...

Hausman presented graphs to show that Wal-Mart's impact on consumers varies by income category: For families with incomes less than $10,000 annually, a super center makes a 30 percent difference in what they can buy. "The marginal utility on the poor is greater," he noted. The rate of overall improvement in consumer welfare [from] a Wal-Mart super center's direct and indirect effects on the cost of food in a community averages 3.75 percent, Hausman said.

"Getting a 3.75 percent improvement in consumer welfare is greater than any tax reform or other policies. And while Wal-Mart pays its employees less -- which does affect local wages -- you still can't beat that 3.75 percent. If economists could improve consumer welfare by that much, we'd all be heroes," Hausman said.

Hausman said the U.S. Bureau of Labor Statistics ( BLS ) is taking a puzzlingly inaccurate measure of Wal-Mart's economic role, especially for lower-income families: According to the BLS, consumers are no better off when a Wal-Mart enters their community. But that's not what the numbers show. According to Hausman's research, excluding Wal-Marts from local markets creates a "large loss" to consumer welfare, he said.

Hausman is co-author, with Ephraim Leibtag, of "Consumer Benefits From Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart" ... and "CPI Bias From Supercenters: Does the BLS Know that Wal-Mart Exists?" .... Slides from Hausman's presentation are available on his web site.

The last part refers to bias in the way the CPI is calculated by the BLS. See the second paper below on how the BLS does not account for the fall in the price of the reference basket of goods when consumers purchase goods at lower price from Wal-Mart after a store enters a market. Here are the papers:

Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart, Jerry Hausman and Ephraim Leibtag, NBER WP 11809, December 2005: Abstract Consumers often benefit from increased competition in differentiated product settings. In this paper we consider consumer benefits from increased competition in a differentiated product setting: the spread of non-traditional retail outlets. In this paper we estimate consumer benefits from supercenter entry and expansion into markets for food. We estimate a discrete choice model for household shopping choice of supercenters and traditional outlets for food. We have panel data for households so we can follow their shopping patterns over time and allow for a fixed effect in their shopping behavior. We find the benefits to be substantial, both in terms of food expenditure and in terms of overall consumer expenditure. Low income households benefit the most. [AEA web link] [Link on Hausman's page]

CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?, Jerry Hausman and Ephraim Leibtag, NBER WP 10712, August 2004: Abstract Hausman (2003) discusses four sources of bias in the present calculation of the CPI. ... We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. ... the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out' Wal-Mart's lower prices. ... We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year. [Link on Hausman's page - June 2005 revision]

For a different perspective, see Paul Krugman: Wal-Mart's Excuse.

    Posted by on Wednesday, January 25, 2006 at 01:59 AM in Academic Papers, Economics | Permalink  TrackBack (3)  Comments (7)

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