Monopoly, Monopsony, and Walmart

This question assumes a basic understanding of market operations, including linkages between markets (i.e., an informal understanding of general equilibrium concepts), and an in-depth understanding of monopoly and monopsony P* and Q* outcomes relative to the perfectly competitive outcome. It is appropriate in a principles of microeconomics course at any point after this theoretical material has been covered. While most students are familiar with Walmart and its practices, I find that providing one or two articles on Walmart (see below) prior to this activity provides students with a common context in which to approach this activity.

Assuming that the articles have been read prior to class, this activity can be completed within a 55 minute class period or as part of a longer 80 minute class period. This activity is appropriate for both large and small class sizes because the open ended nature of the question and options ensures debate.

Note that an alternative means of using this problem that may take slightly more time (e.g., a full 80 minute period) involves having students rank the different market participants from least to most positively (or negatively) affected rather than choosing a single most affected category. This alternative has the benefit of considering more carefully and justifying the Walmart impacts on all of the market participants. If one were to adopt this alternative, the options would become:

Which of the following options best ranks who is affected by Walmart's presence, from most positively to most negatively affected?

A.

1. The residents living in the community in which Walmart locates.
2. Walmart's owners and stockholders.
3. The businesses operating in the community in which Walmart locates.
4. The businesses operating in other communities that sell to Walmart.

B.

1. Walmart's owners and stockholders.
2. The residents living in the community in which Walmart locates.
3. The businesses operating in the community in which Walmart locates.
4. The businesses operating in other communities that sell to Walmart.

C.

1. The residents living in the community in which Walmart locates.
2. Walmart's owners and stockholders.
3. The businesses operating in other communities that sell to Walmart.
4. The businesses operating in the community in which Walmart locates.

D.

1. Walmart's owners and stockholders.
2. The residents living in the community in which Walmart locates.
3. The businesses operating in other communities that sell to Walmart.
4. The businesses operating in the community in which Walmart locates.

Overview

While most principles of microeconomics courses cover monopoly, fewer of them cover monopsony despite the fact that monopsony power is a major influence in our lives as both employees and end user consumers. This activity has students consider the immediate effect of market power in the hands of both buyers and sellers as well as the ripple effects of that market power in related (complementary and substitute) markets, asking students who gains and who loses in a specific instance of well-recognized market power. Specifically, the activity instructs students to first consider Walmart as both a seller of goods and services and as a purchaser of goods and services. It then asks them to identify who from among a range of market players gains the most (and, by default, who loses the most) from the presence of the discount retailer in their community.

This question assumes a basic understanding of market operations, including linkages between markets (i.e., an informal understanding of general equilibrium concepts), and an in-depth understanding of monopoly and monopsony P* and Q* outcomes relative to the perfectly competitive outcome. It is appropriate in a principles of microeconomics course at any point after that material has been covered. While most students are familiar with Walmart and its practices, I find that providing one or two articles on Walmart (see below) prior to this activity provides students with a common context in which to approach this activity.

Expected Student Learning Outcomes

In this activity, students will provide clear examples of who gains and loses under monopoly and monopsony scenarios and how those gains and losses are distributed.

Information Given to Students

Walmart is a discount retailer, which means that they buy items from wholesalers and then resell them to end-users like you and me at relatively low prices.

• Consider the impact that the presence of a Walmart store has on the people living in that community recognizing that those people may very likely both work and shop at Walmart.
• Consider also the impact that the presence of a Walmart has on the business owners operating in that community recognizing that these businesses may or may not directly compete with Walmart remembering that they often rely on customers coming to the community from nearby towns and cities for their continued profitability.

Who gains the most from Walmart's presence in a community?

A. The residents living in the community in which Walmart locates.
B. The businesses operating in the community in which Walmart locates.
C. The businesses operating in other communities that sell to Walmart.
D. Walmart's owners and stockholders.

Student Handout for Walmart Exercise (Microsoft Word 2007 (.docx) 21kB Jul16 18)
Instructor Guide for Walmart (Microsoft Word 2007 (.docx) 23kB Jul16 18)

Prefatory Remarks
Walmart is an incredibly large and powerful retailer with stores (often more than one) in most US counties. In fact, research findings indicate that 95% of Americans purchased something from the retailer in 2016 (https://www.cnbc.com/2017/04/12/nearly-every-american-spent-money-at-wal-mart-last-year.html) while 1.4 million people (1% of the US workforce) are employed by the chain (http://www.businessinsider.com/walmart-employees-pay). Given its prominence, it makes sense to think about why Walmart is so powerful and who benefits from this power?

• Consider the impact that the presence of a Walmart store has on the people living in that community recognizing that those people may very likely both work and shop at Walmart.
• Consider also the impact that the presence of a Walmart has on the business owners operating in that community recognizing that these businesses may or may not directly compete with Walmart remembering that they often rely on customers coming to the community from nearby towns and cities for their continued profitability.

Discussion Prompts
Students often think of large companies as exercising monopoly power merely as a result of their scale of operations. I want students to look beyond company size and consider the nature of the market in which these firms operate to determine if there are natural or contrived barriers to competition that enable market power, and I want students to think of firm behaviors in both output and resource markets. In working through this question, I want students to consider the following topics:

• Barriers to entry for Walmart competitors, if any (contestable markets)
• Walmart prices relative to competitors' prices
• Walmart's reputation for wages and benefits and the plight of Walmart workers
• Walmart's volume purchasing opportunities
• The nature of the deadweight loss in wholesale product and labor markets
• The impact of Walmart's presence on complementary and competing retailers (including but not limited to small mom and pop stores)

To achieve the above, I would be prepared with the following prompts during the discussion period:

1. What enables Walmart to maintain its low price guarantee?
2. What other sellers compete against Walmart? Is the market perfectly competitive? Why or why not?
3. Is Walmart able to exert monopoly power over customers? Why or why not?
4. What other buyers compete against Walmart? Is the market perfectly competitive? Why or why not?
5. Is Walmart able to exert monopsony power over its suppliers and workers? Why or why not?

Closing Remarks
The growth of Walmart in the 1990s and 2000s and now the growth of online giants such as Amazon.com shape the world in which we live as consumers and as workers. Considering the sources and implications of their power with an eye towards long term societal wellbeing lies at the core of our responsibilities as informed citizens. In the final 10 minutes of class,

• First, determine which of the question options (A-D) you would select, given what you have learned. This need not be the same as your group choice or what you would have selected before the classroom discussion.
• Then, write one sentence justifying this choice ("I believe _______ gains the most from Walmart's presence in a community because...").
• Finally, provide a one sentence statement that summarizes what you feel that you learned through the group exercise and class debate.

Students are asked, at the end of this activity, to identify their own answer to the activity prompt. This need not be what they originally thought or what their team decided. Then they are asked to justify why they made the choice that they did. Finally, they are asked to provide a one sentence statement that summarizes what they learned through the group exercise and class debate. This material is collected from a sample of students and assessed against a rubric [TBD] to determine if the learning outcome has been met.

Give Sam Walton the Nobel Prize (Charles Kenny in Foreign Policy 4/29/13): This piece makes a case that Walmart has had a significant positive impact on US poverty.
http://foreignpolicy.com/2013/04/29/give-sam-walton-the-nobel-prize/

The Case for Breaking Up Walmart (Barry C. Lynn in Foreign Policy 4/29/13): This piece argues against the Kenny opinion and provides evidence on the negative impacts of Walmart.
http://foreignpolicy.com/2013/04/29/the-case-for-breaking-up-walmart/

Breaking the Chain (Barry C. Lynn in Harpers 7/06): This article details the monopsony implications of Walmart. (https://harpers.org/archive/2006/07/breaking-the-chain/) -- account required to access the link

Walmart Monopsony Destabilizes Economies as much as Monopoly Does (Daily Kos Blog post 11/26/13): This post makes a clear distinction between Walmart as a monopolist and a monopsonist. https://www.dailykos.com/stories/2013/11/26/1258499/-WalMart-Monopsony-Destabilizes-Economies-as-Much-as-Monopoly-Does