IAP: Econ professor illustrates benefits of Wal-Mart

Jerry Hausman

Economics Professor Jerry Hausman placed the cooling hand of numbers on the fevered brow of 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," held at 1 p.m. on Tuesday, Jan. 17 in E51-151.

Hausman's specialty is econometrics and applied microeconomics. He invented the Hausman specification test, a widely used method for winnowing biases out of econometric models.

His hourlong talk winnowed out more bias -- the anti-Wal-Mart bias -- and focused on the direct and indirect effects for consumers when one of Wal-Mart's 180,000-square-foot super centers comes to town. Throughout his talk, Hausman focused on metrics, presenting 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," he said.

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 thanks to 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" (download PDF file - 168KB) and "CPI Bias From Supercenters: Does the BLS Know that Wal-Mart Exists?" (download PDF file - 132KB). Slides from Hausman's presentation are available on his web site.

A version of this article appeared in MIT Tech Talk on January 25, 2006 (download PDF).

Topics: Business and management, Economics, Humanities, Independent Activities Period

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