It actually makes sense when you think about it. There's no way that supermarkets can compete with Costco on an item-by-item basis. Where they can compete is by offering more variety, a more pleasant shopping experience, quicker checkout, etc. And that's what seems to be happening, according to a new paper published by the National Bureau of Economic Research. The effect is most noticeable in cities with small populations and lots of grocery stores.
Firms do not compete on price and quantity alone. They also compete by innovating, experimenting, and differentiating their products. In retail, they can compete by changing the mix of distribution services and amenities that accompany the goods being offered as well.
The only weird part of the study is that the pattern does not apply to Wal-Mart, where researchers found that prices at nearby groceries actually come down.
*Reader points out that Wal-Mart has a wider selection of merchandise than Costco, which makes it more akin to a traditional supermarket - and might explain the pricing.