Tuesday, March 25, 2008

Is Wal-Mart A Collective Action Problem?

Wal-Mart gets a lot of criticism from a long list of groups from environmental to protectionist to labor union. People complain it destroys jobs and runs local stores out of business. None of these arguments hold water (environmentalism is about private property, free trade emboldens economies, Wal-Mart only works because people choose to go there, etc) and I have yet to hear the rara avis: an anti-Wal-Mart argument that makes economic sense. On a theoretical level, I think I have one.

Consider a small town. Each of these people value two things: their downtown mom-and-pop stores (that small town feel) and low prices (everyone likes a bargain). Let us also suppose that each person values the small town atmosphere over the prices--in other words they are willing to pay a premium to keep the charm of the hamlet.

Now suppose a Wal-Mart comes to town. Each resident has a choice between shopping downtown (and thus supporting it) or shopping at Wal-Mart (and thus get the lower prices). Since the downtown won't go away if one person "defects" to Wal-Mart, that defector can enjoy low prices and still have that small town feel they love so much. It's strictly better. (Note enjoying that small town feel does not require actually trading with them--they simply walk along Main Street and breathe in the atmosphere.)

Naturally everyone has an incentive to do this, thus everyone goes to Wal-Mart (or a lot do) and the downtown disappears. (Set aside any arguments of downtown revival because people can now afford more stuff.) As an individual, you can choose to end your defection and go downtown, but you, lone patron, will not save the stores. It will only work if everyone (or a lot) of people will work with you. But their personal incentives doesn't lend them to that so no one does. It's a collective action problem.

The downtown atmosphere is what economists call a positive externality--people who aren't paying for it still are able to enjoy it. The town could solve this issue by walling off the downtown and charge a small fee to those who wish to visit it. Taxes to the stores could be reduced by a proportional amount (who could then decrease their prices slightly) and the only difference ends up being that free riders can no longer ride for free. Naturally, the town could also ban Wal-Mart if it turns out internalizing these externalities prove too costly (which it very well might be).

Anti-Wal-Mart groups who wish to use this argument should exercise caution. The assumptions are rather strong (nobody is willing to swap low prices for their downtown) and demonstrating they apply to a given community is difficult. Moreover, the establishment of this argument can quickly be applied to areas the group may not desire. If one can ban Wal-Mart on the grounds that low prices are too expensive, then one can ban Internet access, delivery services, resident mobility, and a host of other options on the grounds that people cannot be tempted by alternatives lest the downtown is abandoned. The line between preventing a collective action problem and outright tyranny is a thin one indeed.

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