The Dynamic Competitive Effects of Walmart's Store Format Choices

We study the role of store-format choices in dynamic competition between two major chains in the U.S. discount-store industry. The aim is to measure the effect on Kmart profits of Walmart Supercenters, which combine a full-service grocery with a regular discount store. The data are a six-year panel of chains' entry and exit histories (including Walmart's format choices) in a set of small- to medium-sized markets. Using recent techniques for the empirical analysis of dynamic discrete games, we estimate Kmart's exit decision in each market as arising from an asymmetric Markov-perfect equilibrium of a dynamic game of entry and exit. In the structural estimation Kmart's per-period profits show a significantly negative response to both the Supercenter and ordinary Walmart formats. But any difference between the effects of the two formats is not statistically discernible, which is consistent with earlier research