Just a minute a go I posted on Virginia Postrel and the Hotel Room problem. There might be serious data issues but from a conceptual level it doesn’t seem that bad to me.

On the other hand the Super Walmart Problem is a big deal.

Here is the problem: Super Wal-Mart sells the “same” stuff as Harris Teeter but at a much lower price.

Classic price premium problem. We expect nicer amenities to be at the root. We walk into Harris Teeter and low-and-behold its nicer. Problem solved, our work is done here fellas.

Not so fast. A few years ago Super-Walmart didn’t exist and some of its customers were forced to shop at Harris Teeter for groceries. It would ludicrous not to include the expansion in low price choice. It would be like not account for the creation of the Iphone.

So Wal-Mart did lower inflation. How much?

Well maybe we can try to track home much Wal-Mart impacted the prices at Harris Teeter. So, before Harris Teeter had some sort of quasi monopoly. Wal-Mart broke that monopoly and offered more choice. Harris Teeter then must have responded to that. Maybe we can measure it?

Lets look.

Whoops!

Prices at Harris Teeter went up after the introduction of the Super Wal-Mart?

Why?

Because super Wal-Mart sucked away all the low income patrons. No need to worry about keeping prices low to attract them anymore. You aren’t going to beat Wal-Mart. You might as well raise prices.

That’s bad, but it gets worse my friends.

See in part the story of Harris Teeter is that Wal-Mart swept away the “elastic demanders” those who are sensitive to price. Allowing Harris Teeter to raise prices. However, we might be able to get a handle on what’s going on by looking at relative growth rates in sales.

Presumably Wal-Mart cost Harris Teeter sales and we might be able to back out some sort of cross-price elasticity of demand from that.

Here is the further problem. The very existence of Super Wal-Mart likely increased the amenity value of Harris Teeter.

Why?

Well lets be frank. One thing that Harris Teeter shopper dislike is shopping next to lower income people. We might not approve of these preferences but they are real. Super Wal-Mart drew away the poorer customers thus improving the shopping experience for those customers left at Harris Teeter.

Get a statistical handle on that problem.

All of this is to say that indexes are really, really hard and my sense is that the further we move towards a society that consumes amenities rather than tangible goods the worse the problem is going to get.

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