Entry of large supermarket chains has been generating a lot of debate on the fate of small scale retailers or mom and pop stores since the nineteen fifties. However, Walmart exceeds all other retail chains in terms of its effects. Based on a series of economic principles and theories, the paper shall argue that traditional small scale shops are likely to close shortly after Walmart enters their areas of operation.
Markets and market mechanisms
Markets are defined as groups of consumers who have the willingness to buy a product (Where product infers either tangible goods or services) and the ability to do so through the resources needed to acquire it or through concerned laws and regulations to do so (Ely, 2009). In the case study under consideration the term market will apply to groups of individuals who possess the ability and willingness to buy any of the products offered at Walmart. These products range from food stuffs, electronic items, clothes, cosmetics to many more items found in Walmart shelves. It should be noted that the latter market may choose to purchase those same products from other specialty businesses. Walmart was chosen as the reference point because it is the subject of analysis in the paper and its wide selection of commodities is what has the potential to alter how traditional retail shops operate.
Market mechanisms on the other hand are the means with which demand and supply forces determine quantities and prices of products offered for sale in competitive markets. In other words, supply and demand are the driving force behind the latter market. Market mechanisms attempt to answer a number of questions on production and consumption such as: what/ who should produce? Or who will consume? In competitive markets, no single entity has the ability to influence prices; consequently, producers and consumers (the market) are the ones who are left with this responsibility. Price is critical to any market as is automatically determines who can afford to buy the product and what should actually be produced. This implies that price is the ultimate incentive for both producers and consumers. High prices cause suppliers to produce more while consumers will buy less. Therefore the forces of production i.e. supply and forces of consumption i.e. demand are pushed towards a balance known as equilibrium. This supply and demand mechanism is what offers the most efficient outcome (Ely, 2009). For the case of Walmart’s entry into this rural community, if the market under consideration were a perfectly competitive one, then the latter rules of price, supply and demand would apply. In perfectly competitive markets, there are a vast number of assumptions: that entry and exit of players can occur at will, that firms are relatively small and that no entities collude with another to control price in that suppliers are price takers while the market is the price determinant. However, none of these assumptions exist in the latter area. Walmart is a very large firm, exit and entry of retailers in this rural community will occur at an expense and Walmart often negotiates with its suppliers to control prices. Therefore, the traditional small scale shops cannot compete favorably with an organization that has an upper hand in the demand and supply cycle. Reports indicate several scenarios that make Walmart act like a monopoly; it determines what consumers purchase by dictating terms of manufacture to its suppliers such as its choice to sell only PG rated DVDs. Also, because the company has an ability to set low prices, it puts small retailers at a disadvantage because they are less stable and cannot offer similar prices thus pushing them out of the market. Predatory pricing is a reality in monopolistic markets and it is also prevalent at Walmart.
The role of markets and pricing in the supply and demand of goods and services
There are two major ways in which one can understand the influence of markets and pricing on demand of goods and services and these are through the income effect and substitution effect. Price elasticity of demand is the rate at which quantity demanded for a good alters with change in price. Usually, this is obtained from the slope of the Demand vs price graph and is usually negative since demand decreases with increase in price. When the price of a commodity is high, then this has the potential to make a consumer less wealthy. In other words, one’s real income has a negative correlation to price. (Reynolds, 2005). Walmart has the ability to affect real incomes of consumers because they offer a wide range of commodities with high values and also since most consumers prefer to shop everything in this discount shop, then the overall sum of goods spent has a substantial effect on their real income. This is why demand for Walmart goods is much higher than it is for small scale retailers. Markets and pricing also affect demand through the substitution effect mechanism. Here, when the price of a good keeps reducing, then chances are that the market will substitute the more expensive goods with this one. In other words, demand will keep rising for the commodity as long as others remain relatively higher. Walmart’s goods directly substitute those goods offered by other small scale retailers. The people of this rural community will realize that if they bought say a juice maker from Walmart, it would be much cheaper than purchasing fresh made juice from a mall scale retailer. Consequently, they will substitute the juice maker for juice. This is the reason why a number of traditional mom and pop stores may be driven out of business when Walmart entered this rural community.
In terms of the supply side, price is directly proportional to the quantity of goods on offer. In perfectly competitive markets, it is assumed that all suppliers are relatively small and that they possess relatively minimal influence on the prices on offer. In other words, they are price takers and generally alter the quantities supplied to meet these externally imposed prices. The discount store under analysis is definitely not a small one, in fact Walmart has the capacity to influence prices substantially because almost all small towns that report new Walmart openings often record rapid decline in prices of commodities throughout the entire business sector. Usually in the short term, prices often go down by two or three percent and in the long term, they reduce by ten percent. This large discount store does not abide by conventional rules of markets, pricing and supply. The firm has an ability to influence price and this allows it to alter quantity of output to its advantage. Other smaller firms do not have such a lead and if they are offering similar commodities to the ones prevalent at Walmart, then chances are that quantities supplied cannot keep up with Walmart’s abilities and this is why will be forced to close.
Consumer behavior: How choices of consumers affect supply and demand of goods and services
Consumers live in an environment with lots of choices but they do not possess an infinite source of possibilities since they are limited by budget constraints and their own preferences (Reynolds, 2005). The latter term refers to what consumers like buying while budgetary constraints refers to those limitations imposed by their incomes. One’s level of satisfaction from a particular good is what determines consumer choice. In other words if there is a choice between two commodities and both of them yield the same level of satisfaction, then the consumer will be indifferent and these commodities will fall on the points in the indifference curve. Nonetheless, consumers tend to want to trade certain goods for others and this is referred as the marginal rate of substitution. In the indifference curve, once the quantity of a certain good is minimized, then more of other goods need to be made available: this explains why the latter curve normally slopes downwards. The indifference curve concept can be used to understand some of Walmart’s trends in this rural community. Studies carried out in varied states have indicated that the aggregate economic growth reported in recipient communities often remain unchanged. In other words, these studies indicate that despite closure of traditional mom and pop shops, economic robustness within a community does not diminish (Harris, 2006). This implies that savings adopted through the purchase of commodities from Walmart by such individuals is likely to be directed to other activities in the town and this eventually leads to growth. For example, when members of these communities manage to save up their incomes through purchase of groceries at lower prices, then they may decide to spend those savings at a restaurant or some other leisure activity like bungee jumping. The consumer choice model therefore enables one to understand why most people tend to be more willing to trade off buying households from Walmart to using it in leisure spots. The marginal rate of substitution therefore increases when Walmart makes goods available and this gives consumers power to trade off their purchase with other goods or services not offered at Walmart. In the end, old businesses will be eradicated and new businesses will develop in order to replace those ones that had closed up and this keeps the economies of such areas constant with time.
Production theory in a competitive market as related to producing products and services
In the production theory, it is often assumed that the producer is that entity that has the capacity to change factors of production into finished goods. Usually, this entity must consider technique of production, factors of production and the quantity and type of goods to be produced. In this theory, it is assumed that the producer is largely interested in profit maximization. The latter process is a function or is determined by costs of production and the price of the product created. Usually, a producer will attempt to look for the highest quantity of output that he can make at a particular cost (Reynolds, 2005). Alternatively, if the producer has some powers over the costs of that commodity, then chances are that he will try to get higher products for the least amount of goods produced. It should be noted that the first scenario is common among most small retail firms like the ones in the rural community under study. These individuals have no say over the price of their output and must therefore look for ways of minimizing cost by reducing labor costs and increasing revenue costs. On the other hand, some large scale producers like Walmart have the power to alter and control prices, consequently they can manipulate price to maximize profits. Nonetheless, this does not close out the other option of manipulating production costs. In fact, Walmart has received a lot of criticism from watchdog committees concerning its poor human resource practices and low pay (Harris, 2006). The latter discount store has therefore combined two aspects to make it a formidable force in any location that it desires. Traditional small scale sellers in this rural community will be therefore outcompeted by Walmart because it has two paths to use in profit maximization and this gives it better margins. Also, this matter can be looked at in a different angle- it can be stated that Walmart productivity levels are so high that they allow it to offer minimal prices for its goods and still enjoy marginal profits.
Price ceiling and price floors often affect the cost of production and hence prices of commodities that suppliers can offer. In the case study, price floors like minimum wage are a huge determinant of these costs. The government currently instates a minimum wage- this works to the advantage of employees but narrows down alternatives for Walmart. Therefore in order to maximize profits, the latter institution chooses not to hire employees on a permanent basis or opts to pay only the minimum wage to a large portion of its employees. This will make labor conditions in the rural community quite unfair for households who have to get by on those payments alone.
It should be noted that deadweight loss is another influential aspect in the allocation of resources. Because of taxes, subsidies, price ceilings, price control by Walmart and other externalities, a burden is imposed on both Walmart and the concerned rural community concerning the possibility of efficiently using up their resources.
Production theory, market mechanisms and effects of markets on supply and demand all indicate sound economic principles that explain why it will be very likely for most small scale traditional retailers in this rural community to close after Walmart has entered their town. Most of these reasons are associated with the issue of price and the fact that Walmart offers lower prices than most mom and pop stores.
Ely, J. (2009). Market mechanisms. Web.
Harris, T. (2006). The social and economic impact of big box retailers. Agricultural economics journal 56(6), 12
Reynolds, L. (2005). Basic macroeconomics – an outline. Web.