Can retailers still outfox savvy shoppers?

Ever since people began bartering, there has been a constant struggle between buyer and seller to get the largest possible share of the value-cost margin.  Shoppers now have access to a cornucopia of pricing information on the web.  If stores do not offer reasonable deals, they lose business to Amazon and the like. 

Today's NYT reports how some major retail chains, including JCP (the store previously known as Penney's), have revised their pricing strategies.  The story contains some juicy tidbits on pricing:

An item that cost Penney’s $10 in 2002 was typically marked up to $28. By 2011, a $10 item had been marked up to $40. But the price the customer actually paid for the $10 item increased only 5 cents during that period — to $15.95, from $15.90.

... the average markup for apparel at a department store began around 65 percent. Over 10 weeks, the stores will go to 25 or 30 percent off, then 50 percent off, 60 percent, and finally 70 percent or more, a discount so deep that the stores sometimes sell below cost.

The game for consumers is to tradeoff availability with savings.  The latest, most popular styles may sell out but patience is rewarded with bigger discounts, a form of what we economists call third degree price discrimination.  JCP claims it has cut its retail prices by 40 percent in a move toward what it calls "fair and square" pricing.  Consumer reaction?  Lukewarm at best so far, the article indicates.  One shopper posted “I really, really miss my coupons" on JCP's Facebook page. 

TrueCar vs. "I'll check with the manager"

Automobiles are mass produced by a limited number of sellers, but historically pricing has been far from transparent.  The sticker price is taken as an upper limit (although there are sometimes two stickers: one from the manufacturer and one from the dealer) and it is up to the individual customer to negotiate something lower.  Some people hate to negotiate and thus pay top dollar.  Others relish the process and sometimes can buy at well below dealer cost (once the car is on the lot, the cost to the dealer is sunk so the salesperson will take the best price they think is attainable in the market -- as MBA 505 students all know). I always use it as my first example of first degree price discrimination. 

Recently TrueCar.com has emerged as a useful intermediary.  Potential buyers register at the site and get data on the dealer's true cost along with a guaranteed price from dealers in their area.  Dealers pay $299 to TrueCar for each lead that becomes a sale; customers get multiple bids they can use as leverage before they even enter a showroom.  (I used it recently; the only downside is a continued stream of junk emails from the dealers.)  Of course some dealers are less than delighted with this arrangement, as noted in a story in today's NYT. 

Ultimately one must wonder when a car company will decide to buy out its dealers and revolutionize the retail process.  You would have showrooms with a limited number of demos; after a test drive, customers would order exactly what they want on the web. 

Supremes decide Wal-Mart case

The class action lawsuit against Wal-Mart for gender discrimination has been a popular term project topic in my Global Economics for Managers course over the last few years.  Last week the U.S. Supreme Court decided that the case could not proceed as a class action; instead, individuals or small groups would have to sue on their own.  With fewer plaintiffs (and thus smaller pots of potential damages) such cases will be less appealing to lawyers and will be less likely to be brought. 

This does not mean that Wal-Mart is innocent of discriminating against women; it just means that the cases cannot proceed as a massive class action. 

How does Groupon make money?

After initial reluctance to voluntarily subject myself to more email every day, I signed up for Groupon and Living Social two months ago.  Now I get daily messages offering me great deals at spas, golf courses, restaurants and the like.  I have purchased only two coupons and in each instance it was for a restaurant where I regularly eat.  So who came out ahead?  If I spend $10 for a $20 coupon, then the restaurant collects $5 up front but ends up with a net loss of $15 because I was going to eat there anyway. Winners: Groupon and me.  Loser: the restaurant.

So why is Wall Street going gaga over Groupon's IPO?  Megan McArdle takes a hard look at the underlying business model.  Coupons provide another way to charge different customers different prices for the same good.  A restaurant can come out ahead if it has excess capacity and attracts new customers with deep pockets.  It can lose big-time if brigades of coupon clippers eat frugally and crowd out regular customers.  Waitstaff also may not be pleased if tips head south. 

This may just be my imagination, but I think I am seeing fewer deals being offered by established businesses and more offers coming from companies I never heard of.  In which case I am going to be hitting the unsubscribe button pretty soon. 

How soon before we watch first run movies at home?

Hollywood studios make films that are first distributed to movie theaters, followed by cable on demand, DVD release, pay TV and free TV.  The system is designed so that those who have the highest demand to see a film pay a premium for seeing it sooner than others, whereas the more patient can wait a few months and get a much lower price. 

In the not too distant future, we will have enough digital bandwidth to allow direct downloads from servers at movie studios to homes.  Won't this then spell the end of the movie theater?  The Economist magazine has an interesting assessment of where the movie industry is going in terms of product distribution.  Expect studios to shorten the traditional four month window between initial release to movie theaters and wider release via cable on demand.  Movies may be available within two months after their release, but the rate will be much higher than $3.95.  However, the full cost for a family to attend a movie can easily exceed $60 once one accounts for family size, cokes and snacks, and babysitters.