South-Western College Publishing - Economics  
Wal-Mart vs. Sears-Mart
Subject Sears and K-Mart join forces to battle Wal-Mart
Topic Production and Costs; Monopolistic Competition; Profit maximization and the firm
Key Words

scale, efficiency, product, retail, Wal-Mart, Sears, K-Mart

News Story

Is bigger better in the retail world? Sometime yes - if you're a giant firm like Wal-Mart. Sometimes no--when you're anyone else in the field, and it may be impossible to get large enough. The time is getting close when consumers will find out the answer. Sears and K-Mart, who many years ago were the two largest retailers in the country, have been struggling of late. They have just combined forces to battle the current two largest retailers: Wal-Mart and Home Depot. The new Sears-K-Mart combination will be the third largest retailer in the country with combined sales of $55 billion (in 2003, Wal-Mart had $256 billion in sales; Home Depot boasted $65 billion in sales).

K-Mart Chairman Edward Lampert argues, "It is pretty obvious that scale is important to compete effectively." He is determined that the new combination will have a sufficiently low cost structure to allow it to compete with Wal-Mart. Part of the plan is to rename some K-Mart stores as Sears, and allow brands to be sold at one another's stores. For example, Sears' flagship brand Craftsman tools will be sold in K-Mart, while Martha Stewart Living products, formerly exclusive to K-Mart, can now be sold in Sears' stores.

Other industry analysts, aware of the two companies' historic inability to compete with Wal-Mart, are not so sure. They are concerned with the fact that Wal-Mart is so big, no other firms can compete with it, short of everyone else in the market joining forces against Wal-Mart. Given Wal-Mart's head start in databasing and arranging volume discounts from manufacturers, can any entity compete effectively?


Questions
1.

Does combining the two firms in order to achieve greater economies of scale indicate that each firm operating separately was on the upward-sloping or downward-sloping part of their long run average cost curves? Why?

2. Why does such a merger allow an individual firm like Sears to reduce its cost, while at the same time increasing output? Explain with a graph of marginal and average costs.
3. What do we call a market in which a single buyer dominates all transactions? Does WalMart fit this definition? Why or why not?
Source Floyd Norris. "Trying to get big enough to battle Wal-Mart." The New York Times.. 18 November 2004.

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