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Walmart and Network Exchange

Walmart’s famous everyday low prices has made it America’s largest retailer and private employer— with billions of dollars of revenue and millions of employees, all contributing to its reputation as powerful economic force. In this article “How Walmart Keeps its Prices so Low” by Steven John and published by Business Insider, John explores some of the ways Walmart delivers impossibly low prices to customers, making one thing clear: Walmart uses its power while making transactions with customers and suppliers to its advantage.

This relates to the concept of Network Exchange that we discussed in class, where we can map how nodes divide potential surplus when they agree to make a deal. Generally, the nodes with the most amount of outside options have more strength when negotiating with their neighbors and therefore get more surplus in a transaction.

We can see this concept clearly illustrated when we look at the way Walmart deals with its suppliers. Walmart works directly with manufacturers and as one of the largest retailers in the world, they have a lot of leverage when purchasing goods. That is because when it comes to choosing a manufacturer, Walmart has a lot of options, however for a manufacturer working with Walmart is a huge and rare opportunity because it has the potential to boost their sales quite dramatically. This creates an uneven power dynamic because Walmart can use their leverage, as they often do, to force manufacturers to lower their prices in order keep Walmart as a partner. Walmart can then use this as a way to increase their own profit but also as to achieve those low prices for consumers.

We can further observe how Walmart uses leverage when looking at where they place their businesses: often in rural areas where consumers don’t have much of a choice of where they can shop. Because the lack of competition, often consumers don’t have many alternatives to shopping at Walmart, so they end up shopping there, contributing to Walmart’s power and reach. If Walmart were to place their store in a location where consumers had options of many comparable stores like Costco, IKEA or Target, Walmart would have less power because consumers would have more alternatives, however by placing many of their stores in non-competitive areas, Walmart preserves a power dynamic that increases their leverage and guarantees business.

Walmart gives us a real life example of how Network Exchange is applicable to both the business world and the goods we put our shopping carts.


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October 2019