Wal-Mart a Monopoly? A Monopoly

¶ … Wal-Mart a Monopoly?

A monopoly is a situation where a single business entity essentially controls an industry in a given market. There are few true monopolies in the United States today, in part because the characteristics of a monopoly are difficult to meet. Antitrust legislation essentially forbids all monopolies, aside from the few that the government specifically allows. One quirk of the Sherman Act, however, is that it does allow for a firm to grow into a monopoly. If a firm is able to earn a monopoly through superiority rather than anticompetitive practices, the monopoly is allowed to exist. The ascension of Wal-Mart into the dominant retailer of our time raises the question about whether Wal-Mart is, or could in the future become, a monopoly.

Wal-Mart is the largest company in the world. Revenues last year were $378 billion (Reuters, 2008). By contrast, the nation's second-largest retailer, Home Depot, had revenues of $77 billion; close competitor Target did $63 billion. There is no question that Wal-Mart is a dominant competitor in the retail field. According to 2007 estimates, they held a market share over 30% in household products and over 20% in groceries (Boyle & Arora, 2007). These figures, however, do not come close to constituting a monopoly.

There are three main characteristics of a monopoly. One is that there can only be one firm in the industry. This is not the case for Wal-Mart. The company is strong in many markets, but an examination of any given market shows a large number of competitors. For example, in the grocery market, where Wal-Mart holds the largest national market share, competitors are often regional firms. In the discount store segment, Wal-Mart competes vigorously with other giant retailers such as Target. Wal-Mart's pharmacy competes with national pharmacies. There are few markets, either in terms of product or geography, where Wal-Mart is the sole competitor.

The second characteristic of a monopoly is the lack of close substitutes. As many direct competitors as Wal-Mart has, there are also many close substitutes. These are often positioned slightly above Wal-Mart, but as many Americans have the income to shop at those stores and buy those products, they are considered to be viable substitutes. Indeed, there is very little that Wal-Mart sells that could not be readily procured at another retailer.

The third characteristic of a monopoly is that the entry of new firms is not feasible. It would be very difficult for a new firm to enter any of Wal-Mart's core markets. The company has exceptionally strong buyer power based on its economies of scale. For a firm to enter the market selling products different to those of Wal-Mart, they would need to find a way to differentiate themselves significantly. It should be noted, however, that the only barriers to entry are competitive. There are no legal barriers, and theoretically Wal-Mart's technological competitive advantages could be matched by another firm, given sufficient investment.

Wal-Mart is a price maker, as any monopoly would be. The company is famous for dictating prices to its suppliers. However, with regards to buyers, Wal-Mart is not a price maker. It is reasonable to assume that the company can raise some prices somewhat without losing market share; it is not true that they can raise all prices near indefinitely without losing market share. Wal-Mart has a captive audience, so they could raise their prices without significantly compromising their business, but other competitors would be able to exploit those increases and customers would be able to take their business elsewhere.

The demand curve for a true monopoly is negatively sloped, as is Wal-Marts, but Wal-Mart would lose all of its customers if it raised its price high enough, whereas a true monopoly would not. Indeed, a true monopoly seeks to maximize profit by finding the position on the demand curve where incremental increases in profit meet incremental decreases in demand from the higher price. Wal-Mart seeks to sell at the lowest price. This may not correspond with that position on the demand curve. They do this because it fits with their overall business strategy. Additionally, Wal-Mart does not take advantage of opportunities for price discrimination, as a monopoly typically would.