Comparing Business Concentration of the General Merchandisers Industry with Other Industries

Using indexes of concentration, the general merchandisers industry was compared with other consumer product and/or retailing industries, such as food and drug stores, for the period 1995 to 2006. This paper shows that an increase in concentration occurred in the general merchandisers industry. Compared to other industries, the general merchandisers industry had statistically significant concentration. Thus, fears of monopolization power in the general merchandisers industry may be warranted. The increase in concentration can be attributed mainly to the increase in market share of Wal-Mart. INTRODUCTION When dealing with markets such as banking, insurance, health care, food and drug stores and general merchandisers, a framework requires the identification of major characteristics within such markets (Bain 1959; Scherer and Ross 1990). The major characteristics include the degree of concentration, the degree of product differentiation and the ease of entry of new firms into the market. Cartelization and oligopolistic behavior are feared when industry concentration is high, while unconcentrated industries are favored because they are competitive, promoting efficient pricing. Demsetz (1973), however, turns the argument around by presuming that corporate bigness and high industry concentration are consequences of efficiency in production at the lowest cost. Of special interest in this research is the degree of concentration in the general merchandisers industry due to Wal-Mart’s presence in the group. Arguments go that high concentration may significantly reduce the choices of consumers. This means that a small number of firms dominate the market for daily services, a special concern to the antitrust department of the Federal Trade Commission. In Britain, according to Rohwedder (2006), antitrust concerns generated an investigation of the largest supermarket chains. The largest of these was Tesco, controlling approximately 31 percent of market share, followed by Wal-Mart, then Britain’s Asda chain, which holds a16-percent market share. In the United States, the bigness of Wal-Mart spawns other types of discussion, according to Green (2006). Green explains that Wal-Mart’s war on prices helps check inflation in the United States. At the same time, Wal-Mart is accused of outsourcing manufacturing and jobs to other countries, thus driving wages and benefits down. The new focus of criticism of Wal-Mart concerns its policy of health care for workers in that only about half its Southwestern Economic Review 2 workers are covered with health benefits. The rest are cared for by government programs such as Medicaid. The purpose of this paper is to construct indexes of concentration for the general merchandisers industry for comparison with other industries between 1995 and 2006. The methodology of this research is inspired by Rhoades (1982), who compared the concentration of the banking industry of six countries (U.S., Canada, France, Germany, Japan, UK) by calculating deposits-to-sales ratios of the largest banks in a country to the largest corporations, irrespective of the nature of their outputs. Rhoades calculated for each of five countries the ratio of the largest bank with the largest corporation, making the comparisons for the 5, 10 and 20 largest. This paper, however, goes further than Rhoades by actually computing concentration indexes of six other related industries that deal with consumer products and/or retailing. By choosing related industries, a better picture emerges on the extent of concentration in the general merchandisers industry relative to other industries. The concern of this paper is measuring sales concentration in the general merchandisers industry to determine Wal-Mart’s market power among the group of major companies in which Wal-Mart is a member. A great deal of literature is devoted to the power of Wal-Mart bringing downward pressure on the prices of everyday necessities, downward pressure on wages, downward pressure on profits and relentless cost-cutting. According to Fishman (2006), with Wal-Mart operating virtually in every corner of this country resulting in increases in sales every year, it is of interest to find out if the level of concentration in the general merchandisers industry has been increasing due to Wal-Mart at a level that is statistically significant, a topic that has not been researched. Fishman provides statistics for the spread of Wal-Mart throughout the United States to show the extent of its selling as well as buying power. With a total population in the United States of 293 million and 110 million households in the year in which the analysis was made, some 155 million residents or 59 million households live within five miles of a Wal-Mart store. Within 15 miles, the corresponding numbers are 265 and 99 million. Within 25 miles, the numbers are 285 and 107. According to Wal-Mart, as cited by Fishman, 100 million people shop at their stores in the United States each week. DATA The data on the general merchandisers industry for the period 1995-2006, as well as on the other industries, were obtained from Fortune, which each year since 1995 has provided information on the 1,000 largest companies, including service industries. There are some 62 industries included among the 1,000 companies, classified according to type. The companies comprising the 62 industries are ranked by revenue (Fortune 2006). The choice of the six other industries in this research is motivated by the idea that these industries engage in consumer products and/or retailing, as was done in a similar way by Dunning and Pearce (1985), making seven total industries under consideration. For ease of presentation, the seven industries are denoted by G1, G2,..., G7, as follows: G1: General Merchandisers G2: Apparel G3: Food and Drugstores G4: Food Consumer Products Comparing Business Concentration of the General Merchandisers Industry with Other Industries 3 G5: Household and Personal Products G6: Pharmaceuticals G7: Specialty Retailers ANALYTICAL MODELS According to Hannah and Kay (1977), the most commonly used measures of concentration are the Herfindahl index (H), the coefficient of variation (CV), the standard deviation (S) and, by implication, the variance (S) and the k firm concentration ratio (usually k=4) denoted by CR4. For purposes of contrast, measurement of concentration among the chosen industries in this work was undertaken with the use of the four-firm concentration ratio (CR4), the coefficient of variation and the well known Herfindahl index (H). The Herfindahl index is used in the Merger Guidelines by the Department of Justice Antitrust Division of the Federal Trade Commission in merger and monopolization cases (Rhoades 1995). The Herfindahl index is defined as the sum of the squared market shares of the firms in an industry. By letting Pi=the i firm’s total revenue share of an industry, i=1,...,n; the H index weights each Pi share by itself, then sums the squares. That is