Superbowl Aftermath

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

Valentine's Economics!!!

Sometimes a relationship could really equal money when it comes to giving the right gifts at the right moment. With the Valentine’s Day being just around the corner, the $1.13-billion rose market can be of interest to some economists. A recent article by the Forbes magazine explores the complexities of this market including the distribution process, costs incurred, and pricing strategies.

Initially, one might believe that rose sellers practice price discrimination during this peak season. Indeed, the price of roses increases during Valentine’s week, hopping from $12 to $100 a dozen!!! As the main source for roses sold in U.S., Columbian labor costs only $1.59 per hour. When the Columbians are exporting their roses at less than 50 cents per stem, how are the retailers justified in selling roses at such a high price?

There are several factors that must be considered before accusing the rose sellers of intertemporal price discrimination. First, one should carefully analyze the costs in the rose market including maintenance and shipping. As the author mentioned, the rose industry has a complex supply chain. When moving from one stage to the next, the roses need to be watered, refrigerated and delivered. These variable costs can be significant. Having to squeeze their profit margin 90 percent of the year, the rose retailers are forced to price higher during this season.

In ECON 101, we learned that when demand increases, price increases as well. It is estimated that Americans will buy 189 million roses on Valentine’s Day. Any rational seller will definitely raise the price. So where is the catch? If the price increase is way out of proportion with the increase in demand, we might suspect that sellers have ulterior motives in mind. Without crunching the numbers, however, we can not say anything for sure.

Okay, let’s assume the sellers’ price according to their costs, future losses, and the increase in demand. How would they extract extra from consumers? Well, one way is by bundling roses with teddy bears or some sort of low-cost add-ons and charging it at an appealing price level. Perhaps they could also have some premium packages in their selection to distinguish the rich brats from regular customers.

So if you think roses are too expensive for you, I would suggest picking up some DIY skills. After all, loving someone incurs a price! Ačiū.

By Jim Baltz, Wooi Yang Chang, and Brian Gavron

Rebates: Up for Debate

Rebates, in their myriad forms, are a form of price discrimination. We have probably all received them. They allow retailers to keep the price on a good high, but advertise it for a much lower one. They allow retailers obtain more money from the consumer on purchase, with the promise of return a few months later. Some consumers won't even send in their rebate forms and the company will keep the money the consumer paid - over and beyond the advertised price.

Consumers who demand a lower price are separated from other consumers by their willingness to complete several additional steps past purchasing a product and to wait weeks to receive their 'discount' in the mail. While consumers certainly self-select their price by complying or not-complying with the terms of the rebate, and even before this by searching for items that have rebates offered in the first place, the complexity of the situation becomes immediately apparent when companies advertise prices that not all consumers receive (by not completing the rebate process or doing so incorrectly) or when companies simply do not fulfill their promises.

Highlighting their interest in the topic, the FTC will be holding a day of Rebate Debates to garner information concerning best practices and common problems that according to consumers, retailers, and academics. There are companies that do not, as the existence of Rebate Report Card verifies, comply to customer standards. During 2005 the FTC brought a case and won against well-known CompUSA for extending the time in which they delivered on rebate returns without their consumers' knowledge. Similarly, a high level of complaints against the process has prompted some companies, such as Best Buy, to curtail their rebate programs.

What the FTC will conclude concerning rebates remains unknown, though it is likely that the issues presented here will be some of those that they discuss.

Posted by: Tiffany Luong and Vicky Ukritnukun

Amazon.com with New Tricks

If you have ventured on to Amazon.com lately you may have seen one of their latest ploys to get consumers to buy more of their goods. Now each product page has a bundled good for purchase with the good. Before one can scroll down to read the reviews of the product one sees the “Better Together” section. Below is a screen shot from the site with Talladega Nights: The Ballad of Ricky Bobby priced with Pirates of the Caribbean.

Even though it may appear that buying these DVDs together one will save about $21, the price given is actually the price of both movies combined. So is this actually a creative pricing strategy? Buying the two goods together will reduce the average cost of the goods as shipping them together will be cheaper, but the marginal cost is unaffected. Also Amazon.com is known worldwide for having some of the cheapest prices for books and other goods. So by buying both products here one is achieving more consumer surplus and Amazon.com is earning more revenues.

The “trick” here though is that Amazon.com is only providing the appearance of a bundled good as the goods can be separated at no charge on the checkout page. Which brings us back to the question, is this a pricing strategy or marketing ploy?

Posted by Michael Ledwith, Jessica Halper, Drew Muir, and Jake Carter-Lovejoy