Competitive expansion strategies between retailers: the case of Wal-Mart and Target

Abstract

ABSTRACT This paper examines competition between two main retailers, Wal-Mart and Target, in the context of expansion strategies. I use a structural model assuming that the firms are forward-looking and engage in dynamic strategies forming a Markov perfect equilibrium (MPE). The results show different expansion strategies and the asymmetric impact of the competitor’s presence on each retailer. Target must operate in a comfort zone to benefit from the spillover effects of Wal-Mart’s presence and avoid cannibalizing its own stores. On the other hand, Wal-Mart dominates most market structures and is not impacted significantly by Target. This result can be generalized to the case where small retailers benefit from clustering with their own stores and competitors’ stores. An implication is that competing retailers engage in back-and-forth expansion strategies as one tries to penetrate a market and the other tries to defend. However, unlimited expansion results in cannibalization. The fixed cost for Target also contains a comfort zone due to a quadratic relationship with the number of stores owned, but the relationship is monotonically increasing for Wal-Mart. Another notable result is that Target’s fixed cost per store added can be as high as nine times that of Wal-Mart. Overall, the results show that primary and secondary players can co-exist in the same market to reap benefits despite having different scales of operations. The results provide practical implications for policymakers who can use these insights to design retail and zoning regulations that protect local shops and maintain fair competition.