So we've heard some interesting news after the Superbowl; a Bears fan lost a bet to a friend and he is filing a request to change his name to Peyton Manning... and Circuit City announced that they are going to close down 69 of their stores.
After a series of price wars over flat-panel TVs in the few months leading up to the Super Bowl, Circuit City Stores Inc., the nation's No. 2 consumer electronics retailer, stated on Thursday that it plans to close seven domestic Superstores, a Kentucky distribution center and 62 company-owned stores in Canada to cut costs, switch resources to online sales, and improve its financial performance.
The price war led to a minimum of a 15% price drop for flat-panel TVs, which, despite keeping the price of the TVs much higher than a lot of people's budgets, led to a definitive increase in the number of flat panel TVs sold. This was an example of network externalties at play since the consumer's willingness to pay for a good increased as the number of other consumers buying the product rose. On one hand, this price drop benefited the customers who have been consuming more and more flat panel TVs, but on the other hand, hurt the store itself since the gain in sales could not recoup the loss in profits. Thus, some sort of change was inevitably necessary. This bold move indicated a market re-structure decision based on both cost and non cost determining factors. Tough competition with low gross margins, the need to improve efficiency, and the market size of the industry were the main noncost detereminants of the industry structure.
This decision will further increase the market share of dominant competitors such as Best Buy and Walmart; undoubtedly limiting customers' choices and further exploiting consumer surplus. On the other hand, since online sale service is further expanded, more customers might switch to online shopping due to high efficiency.
on behalf of Pamela Tsang, Thomas Li, and Chi Liu
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