Does Banning Walmart Help Mom-and-Pop Retailers?

As “Big-Box” retailers like Walmart have proflierated in recent years, “Mom-and-Pop” retailers have asked local governments to ban or limit Big Boxes, arguing that Walmart and their ilk drive small, independent retailers out of business.

One response to this complaint is, “Too bad.”  Walmart’s large size allows it to operate efficiently and offer low prices; independents are less efficient and so should get driven out of business.  Independents may be better than Big Boxes at service, convenience, specialty items, and “personality,” so many will survive despite nearby Big Boxes.  But if some fail and exit, that is what economic efficiency demands.

A different response is that, even if Big Box entry hurts independents, laws that limit Big Boxes do not necessarily help independents.  That is precisely the conclusion of new research by Raffaella Sadun (Harvard Business School).  Analyzing entry regulation in the United Kingdom, she finds that

independent retailers were actually harmed by the creation of entry barriers against large stores. Instead of simply reducing the number of new large stores entering a market, the entry barriers created the incentive for large retail chains to invest in smaller and more centrally located formats, which competed more directly with independents and accelerated their decline.

Thus even if policymakers want to protect small retailers, the “treatment” (government intervention) can be worse than the “disease” (competition)!