Much to the chagrin of merchants such as Toys 'R Us, Wal-Mart uses toys as a "loss leader" during the holidays to lure shoppers into its stores. This strategy has driven some independent toy sellers into bankruptcy.

Wal-Mart's already slashed prices on more than 80 toys but not on T.M.X. Elmo, which industry experts peg as one of this year's hottest toys. Meanwhile, toy merchants, like Toys R Us and KB Toys, are fighting back by stocking more toys found exclusively at their stores. But whether this is enough remains to be seen.