The Myth of Lower Prices: Do Multinationals Save Us Money?

The most commonly cited argument in favor of the expansion of multinational retailers is one of costs and benefits. Proponents argue that the cost of the proliferation of multinational corporations—displacing local retailers who create more employment per dollar of sales—are outweighed by the benefit of lower retail prices. However, the theory behind this prediction, while intuitive, may rest on some shaky assumptions. In a recent study, economist José Caraballo-Cueto argued that the claim that lower prices always accompany the growth of multinationals is weakly supported.

Caraballo-Cueto used Puerto Rico as a case study because it has one of the highest proportions of Walmart and Walgreens stores in the world. Puerto Rico has also experienced significant declines in domestic retail market share as multinational retailers increasingly displace domestic competitors across industries.

Caraballo-Cueto took representative samples of products—identical in brand, label and weight—and compared their prices between domestic and multinational hardware stores, pharmacies and supermarkets. His results showed that Home Depot had higher prices than its domestic hardware store competitor for 69.5 percent of products in the sample and that Home Depot’s prices were at least 15 percent higher on average. Similarly, he found that Walgreens’ local competitor offered prices that were at least 4 percent lower. The supermarket sector, however, was much more competitive, resulting in smaller price differences. Caraballo-Cueto’s analyses showed that while there were statistically significant price differences between domestic and multinational retailers in the hardware and pharmacy sectors, there was not a statistically significant difference in the supermarket sector.

Caraballo-Cueto identified four major takeaways from his research. Firstly, he pointed out that Walmart should not serve as a proxy for multinational retailers in general. Walmart has a specific pricing strategy that other retailers do not necessarily follow. Secondly, domestic retailers in the supermarket industry can have similar price levels to their multinational counterparts. Thirdly, multinationals’ cost and efficiency advantages do not always mean lower prices than their domestic counterparts. The study highlighted the fact that multinationals experience certain important limiting factors that influence their pricing decisions such as fluctuating market power, the company’s overall profitability requirements, and indirect costs. Domestic retailers, for example, have no central company to mandate profit margins. Finally, Caraballo-Cueto attributed the findings of low prices in domestic retailers to the power of local buying groups and cooperatives created by small and medium-sized enterprises.

These findings could also be relevant to other sectors that have seen a similar proliferation of multinational retailers per the cost-benefit argument. Caraballo-Cueto’s research, if validated by further study, could precipitate a shift in the discussion over multinational retailers. Caraballo-Cueto argued that policymakers should consider supporting and protecting local buying groups whose support of local retailers will positively affect employment, local reinvestment, and market competition. Then competition from multinationals would spur lower prices and reduce the cost of living.

The author suggested that more research must follow, particularly into specific efficiency benefits and service characteristics—customer service, location, complementary goods and parking availability—that cause people to prefer multinational retailers. In addition, future researchers should replicate this study in other countries to get a better idea of the overall picture.

Article source: Caraballo-Cueto, José. “Are Multinational Retailers Really Selling at Lower Prices Than Domestic Chains? Evidence from Three Sectors.” Margin: The Journal of Applied Economic Research, 13(1). (2019): 49-82.

Featured photo: cc/(SteveRosset, photo ID: 145911189, from iStock by Getty Images)