Friday, December 02, 2005

The anti-Walmarts: have I got an upward sloping demand curve for you

I offer this up as an example of upward sloping demand curve (see the discussion in Marginal Revolution.) Well, maybe just an upward sloping portion of some individual demand curves. According to this report, some consumers have stopped buying from Wal-Mart because they think its prices have dropped so low, they must be hiding some "unfair" business practices. (Is this Only In America? I wonder.) Most people shrug it off - see, their demand curves are downward sloping. (Why else is this a newsworthy report? Man bites dog, see.)

Wal-Mart critics rail against excessive "market power". Duh. Might as well condemn the consumer's "market power". Why does Wal-Mart drop its prices? Only to persuade consumers to buy more. In fact Wal-Mart is the silver bullet against another kind of market power - the anticompetitive practices of suppliers, other retailers, and organized labor. Maybe Wal-Mart should be up for a Trust-Buster award.

The price-tamping effect of Wal-Mart is confirmed by some recent research, cited in a Business Week article. I don't know about those upward-slopers, but give this normal consumer Wal-Mart-style pricing anytime.

7 comments:

Amadeo said...

Even the charge that the presence of Wal-Mart kills small mom-and-pop businesses in its wake has to be viewed differently.

Wal-Mart does not possess any power to do that, it is the consumers who determine which businesses should thrive or die.

But this is a very stubborn issue that tends to drive a lot of small town folks to the anti-Wal-Mart side.

Another free-markets issue?

Econblogger said...

With this blog - naturally.

Anonymous said...

What people forget is that before Wal-mart, people living in rural areas were paying very, very high prices. Small mom and pop stores are not terribly efficient because they're small themselves, plus they have no bargaining power. Wal-mart definitely decreased the cost of living for rural customers. Unfortunately, rural folks forget that.

On the other hand, I think price as a signal of quality has always been present, to a larger extent in the US, to a lesser extent in the Philippines. Marketers understand this and exploit it.
From an economic point of view, it's simple: assymetric information. Unless it is a standard graded commodity, consumers have little information to go by to determine the quality of the good, and they default to price.
Think about it: if somebody were to start selling a $500 brand new car, wouldn't people be skeptical with regards to its quality?

AT

Anonymous said...

there's nothing much harder to sell to a consumer than the argument "low prices are bad for you"

as for quality signals from prices. it seems everything that wal-mart stores sell are standardized commodities (the only difference i can tell with the usual everyday items sold at k-mart or target is perhaps shopping bags at target look nicer- but i'm not paying for that). wal-mart's scale force suppliers to cater to wal-mart's demand for standards. even the fairly new tracking technology (RFIDs) would not have been adopted faster without wal-mart saying all of its suppliers use it. wal-mart is really about supply chain management, and they continue to improve efficiency at that end.

i remember reading about a case in germany where the courts ordered wal-mart to increase its prices because they were too low and killing off some big-box retailers!

f

Econblogger said...

F,

I agree with you about Wal-Mart's contribution at the supply chain.

The asymmetric information problem is acute for durable goods. For nondurables (many grocery items), feedback is immediate, and one can reason by reputation effects. Initially such a reputation effect is limited to the product brand; however if the retailer has too many of these deceptively shoddy products, then it gets a bad reputation too. Eventually even the high quality producers would refuse to sell to this stigmatized retailer. So - Wal-Mart would also try its darn hardest to keep deceptively shoddy products off th shelves. (I say deceptively because some products are obviously shoddy and I pay for them anyway because they are so cheap!)

Amadeo said...

Another factor that invariably feeds into how Wal-Mart prices goods is that by and large, Wal-Mart sites in the US, especially on the West Coast, are on real estate that's comparatively cheaper.

Thus, I know that Wal-Mart does not have a store in downtown San Francisco, where real estate values are out of the roof.

John F. Opie said...

Hi -

Been lurking for a while, great blog.

It's not just Anti-Walmarts.

I live in Germany (ex-pat) and there is a curious economic phenomena that I've only seen in Germany. In a discussion a while ago with some economists from Ford (they shall remain nameless), we discussed pricing. It turns out that Ford in Germany did an experiment with one of their car models in Germany in the early 1960s and offered a basic version of the car for DM 5000, which back then was significantly less than other makers were offering.

It didn't sell well. When checking with those who looked at the car and who bought another model, the sentiment was that there must be something wrong with the car for it to be sold for so little money.

So they rebadged those models and raised the price to DM 6200 and sales took off.

In this case consumers believed that they knew the market so well that for an entry to come in below what they perceived to be the market-clearing price, then something could not per se be OK with the car.

True story. It's the reason that why Koreans love the German car market: the German consumer is not loath to pay premium prices.