ESSAYS ON RETAIL PRICING _______________________________________ A Dissertation presented to the Faculty of the Graduate School at the University of Missouri-Columbia _______________________________________________________ In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy _____________________________________________________ by MUHAMMAD TAIMUR KHAN Dr. Emek Basker, Dissertation Supervisor JULY 2013 The undersigned, appointed by the dean of the Graduate School, have examined the dissertation entitled ESSAYS ON RETAIL PRICING presented by Muhammad Taimur Khan, a candidate for the degree of doctor of philosophy in Economics, and hereby certify that, in their opinion, it is worthy of acceptance. Professor Emek Basker Professor Jeff Milyo Professor Peter Mueser Professor Peter Klein Professor Corey Koedel ACKNOWLEDGEMENTS This dissertation would not have been possible without the guidance and encouragement of my advisor, Dr. Emek Basker, who was incredibly patient and supportive as I finalized the three chapters of my dissertation. I would like to thank my friend, Aquib Chodhury, for accompanying me and assisting me during the arduous price collection rounds to grocery stores in Columbia. I would also like to thank the Administrative Assistant of the Department of Economics, Lynne Riddell, for her continued support throughout my stay in University of Missouri. I would like to thank my parents, my brother and my sisters for their love and emotional support throughout this journey. ii TABLE OF CONTENTS ACKNOWLEDGEMENTS ................................................................................................ ii LIST OF TABLES ............................................................................................................. vi LIST OF ILLUSTRATIONS ........................................................................................... viii ABSTRACT ....................................................................................................................... ix Chapter 1: Price Effects of Walmart Supercenters: A Literature Review 1. Introduction ................................................................................................................. 1 2. Background on Walmart ............................................................................................. 2 3. Theoretical Foundations.............................................................................................. 3 3.1. Short-run Scenario ............................................................................................... 3 3.2. Medium-term Scenario ........................................................................................ 8 4. Price Effects of Walmart Supercenters ..................................................................... 12 4.1. Studies using Large Multi-city Datasets across Multiple Regions .................... 13 4.2. Studies Focusing on One Retail Market or a Region ......................................... 25 5. Discussion ................................................................................................................. 29 6. Price Effects of Walmart Discount Stores on Supermarkets .................................... 32 7. Evidence from Other Markets ................................................................................... 35 8. Motivation for Dissertation Thesis ........................................................................... 36 BIBLIOGRAPHY ............................................................................................................. 38 Chapter 2: The Price Effects of Walmart Entries 1. Introduction ............................................................................................................... 42 2. Background ............................................................................................................... 44 2.1. Walmart Corporation ......................................................................................... 44 2.2. City of Columbia................................................................................................ 45 3. Data Description ....................................................................................................... 46 iii 3.1. Price Data ........................................................................................................... 46 3.2. Distance Data ..................................................................................................... 54 3.3. Tax Revenue Data .............................................................................................. 54 4. Empirical Model and Results .................................................................................... 56 4.1. Price Effects of Walmart Entries ....................................................................... 56 4.2. Differential Price Response by Product Type .................................................... 63 4.3. Differential Price Response by Store Type ........................................................ 64 4.4. Differential Price Response by Region .............................................................. 66 4.5. Differential Price Response by Distance ........................................................... 68 4.6. Walmart’s Effect on Pricing Strategies .............................................................. 69 5. Walmart’s Effect on Sales-Tax Revenues ................................................................ 72 5.1. Tax Revenue Trend Analysis ............................................................................. 74 5.2. Differential Effect on Tax Revenues by Distance ............................................. 76 6. Discussion ................................................................................................................. 78 6.1. Immediate-term Scenario ................................................................................... 78 6.2. Medium-term Scenario ...................................................................................... 79 6.3. Study Limitations ............................................................................................... 80 7. Conclusion ................................................................................................................ 82 BIBLIOGRAPHY ............................................................................................................. 84 APPENDIX A. Clustering of Standard Errors .................................................................................. 87 Chapter 3: Price Effects of Minimum-wage Hikes 1. Introduction ............................................................................................................... 93 2. Existing Empirical Literature .................................................................................... 94 3. Data Description ....................................................................................................... 96 3.1. Fast-Food Price Data.......................................................................................... 96 3.2. Minimum-wage Data ....................................................................................... 102 3.3. Merging of Price and Minimum-wage Data .................................................... 106 4. Statistical Model ..................................................................................................... 107 4.1. First-Difference Estimates ............................................................................... 107 4.2. Panel Estimates ................................................................................................ 111 4.3. Are Minimum-wage Legislations Endogenous? .............................................. 118 iv 4.4. Lagged Wages .................................................................................................. 120 4.5. Lead Wages ...................................................................................................... 121 4.6. Falsification Exercise ....................................................................................... 124 5. Conclusion .............................................................................................................. 127 BIBLIOGRAPHY ........................................................................................................... 128 APPENDIX A. Federal Minimum-wage Rates ................................................................................ 132 B. Minimum-wage Rate, % Increase in Minimum Wage, Minimum-wage Enactment Date ........................................................................................................................ 134 VITA ……………………………………………………………………………………137 v LIST OF TABLES CHAPTER 1: 1. Summary of Price Effects of Walmart Supercenter Entries ...................................... 30 CHAPTER 2: 1. List and Description of Products Sold in Discount and Grocery Stores & List and Description of Products Sold only in Grocery Stores ............................................... 52 2. Average Prices of Discount Store Products in 2006-2008 & Average Prices of Non- Discount Store Products in 2006-2008 ...................................................................... 53 3. Shortest Distance from Walmart Supercenter in Miles ............................................. 54 4. Listed Businesses in Columbia Strip malls from 2004-2008..................................... 55 5. Time Period Trends