Saturday, February 26, 2005

The real problem with Walmart

Max comments on some republican who is disturbed by the power of The Wôl-Märt entity.

Let’s ignore for now the fact that the beast bearing the name Wôl-Märt practices a form of modern slavery by locking their sub-contracted serfs inside their stores at night¹ among other crimes against humanity. For now, I want to focus on the Wôl-Märt entity’s inherently socially inefficient characteristics and not those simply acquired through mortal incarnation inside inbred hicks.

The Wôl-Märt is a natural monopoly. Their business model is being the one shop in a middle of no-where county in Dixie with 95% of the stuff people will want to buy on any given day. 5% of the time people may have to mail order or go into a big city a few counties over, but most of the time they can make just one trip to The Wôl-Märt. So if they need a garden hose, a notepad, and a toaster they don’t have to visit two or three towns to go to a garden shop, office supply store, and an appliance store, they can just make one stop. A large part of the entity’s fast proliferation was fueled by leveraging information technology to find out which products are in that 95% and making sure they have it in stock (again, minimizing transaction time costs for remote consumers). Their business is knowing what you’ll want and then putting it all in one place to save you time. This is largely information based and generally homogenous across populations (remember, they only supply the 95% most common items, so discerning taste in jazz fusion doesn’t fit the model) leading to economies of scale. This is in addition to the usual economies of scale that come from being a distributional system very similar in many ways to the post office or UPS.

So, assuming that monopoly pricing is sufficiently guarded against (though it would be ideally suited to isolated rural areas), there exists another problem of market power. The Wôl-Märt has what is called monopsony power. Monopsony power is the inverse of monopoly power in that there are few or only one purchaser to many suppliers. As many have noted, the monopsony power of The Wôl-Märt allows it to push down wages and force suppliers to move to outsource their slavery to China, but I am not talking about that (even though slavery is a, y’ know, crime against humanity). What is another relevant problem is that this monopsony power may force down the rate of innovation.

The Wôl-Märt entity has grown to a point that it may begin to force down the profits of new entrepreneurs entering the market, capturing additional economic rents for themselves. While it is true that inventions are an inherently diversified market and that price discrimination between inventions is possible, that may not enter strongly into the decision process of a new possible inventor. After all, if The Wôl-Märt entity was not satisfied by devouring the souls and profits of X entrepreneurs before me (through seemingly endless and sadistic price haggling), why should I be any different? The monopsonistic suppression of rewards from innovation will slow the pace of innovation, conceptually equivalent to lowering the quantity of the good “innovation” produced. This creates deadweight loss in a similar way to the deadweight loss created by a monopolist (‘poly pushes up prices to reduce quantity, ‘psony pushes down prices to reduce quantity). Who knows, there might be some guy sitting around working in an office who could invent the next Post-it Notes™ but won’t because he thinks dealing with The Wôl-Märt is too much of a hassle.

¹ Key quote:"Ms. Williams said Wal-Mart, with 1.2 million employees in its 3,500 stores nationwide, had recently altered its policy to ensure that every overnight shift at every store has a night manager with a key to let workers out in emergencies." 1-18-04 that's 2004, not 1904 or 1804.


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