The Price Is Right [View All]

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Op-Ed Contributors
The Price Is Right
http://www.nytimes.com/2005/08/03/opinion/03ghemawat.html?th&emc=th


By PANKAJ GHEMAWAT and KEN A. MARK
Published: August 3, 2005
NOWADAYS, mighty Wal-Mart's headquarters in Bentonville, Ark., must feel less like a hotbed of retailing than like a war room. The company faces a groundswell of criticism, largely focused on its treatment of workers. From low wages to limited health care coverage, Wal-Mart has some issues to tackle, and it has mostly responded with feel-good television advertisements and denial. But to chalk up Wal-Mart's success simply to the exploitation of its work force, as many of the company's most ferocious critics do, is simply wrong, for two reasons.




First, Wal-Mart hasn't just sliced up the economic pie in a way that favors one group over another. Rather, it has made the total pie bigger. Consider, for example, the conclusions of the McKinsey Global Institute's study of United States labor productivity growth from 1995 to 2000. Robert Solow, a Nobel laureate in economics and an adviser on the study, noted that the most important factor in the growth of productivity was Wal-Mart. And because the study measured productivity per man hour rather than per payroll dollar, low hourly wages cannot explain the increase.

Second, most of the value created by the company is actually pocketed by its customers in the form of lower prices. According to one recent academic study, when Wal-Mart enters a market, prices decrease by 8 percent in rural areas and 5 percent in urban areas. With two-thirds of Wal-Mart stores in rural areas, this means that Wal-Mart saves its consumers something like $16 billion a year. And because Wal-Mart's presence forces the store's competitors to charge lower prices as well, this $16 billion figure understates the company's real impact by at least half.

These kinds of savings to customers far exceed the costs that Wal-Mart supposedly imposes on society by securing subsidies, destroying jobs in competing stores, driving employees toward public welfare systems and creating urban sprawl.

So in thinking about Wal-Mart, let's keep in mind who's reaping the benefits of those "everyday low prices" - and, by extension, where the real conflict lies.

Pankaj Ghemawat is a professor of business administration at Harvard. Ken A. Mark is a business consultant in Toronto.