Market Structure and Competition in the Retail Discount Industry

Abstract

This article examines competition among Wal-Mart, Kmart, and Target using two distinct but related approaches. The authors first develop and estimate a discrete game in which each chain's store presence and format decisions in local markets depend on the decisions of its competitors and market characteristics. This analysis is extended to evaluate the determinants of store revenues for each chain in local markets as a function of market characteristics, including the presence of competing firms. These regressions use the results of the initial model to correct for the endogeneity of observed market structures. The results from both exercises illustrate several important asymmetries across the firms. Kmart and Wal-Mart prefer similar markets, but Wal-Mart's competitive position is dominant enough to prevent Kmart's operation in otherwise attractive markets. In contrast, Target prefers substantially different market characteristics. In total, the results support a view of the industry as one in which Wal-Mart is dominant, Target serves more of a niche role, and Kmart struggles to find its footing.

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