Walmart and Amazon Price War - Hyper Efficiency and the Consumer
A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.
The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.
How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.
For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.
But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.
It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.
Guardian: US bookshops urge regulator to investigate online price war
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Monopsony Power - Supermarket Bullies?
Many thanks to Janis Thompson at Bristol GS for suggesting this terrific 3-minute video on the battle between supermarkets and their hard-pressed suppliers. A great range of business and economics topics in here, including an obvious starting point for discussing the ethical issues raised in the clip
Download student worksheet (including video link)
Banana Price War Must Hit Growers
The supermarkets are spinning the latest price war for sales of bananas as a welcome boost to the spending power of hard-pressed consumers. True in the short term - cheaper bananas in my household will simply encourage me to buy more but ultimately throw most of them away. The medium term impact on banana growers is of much greater importance and it is this issue that was addressed in a timely and useful Big Question feature in the Independent yesterday. Here is the link.
The Big Question: Why are bananas so cheap, and what does it mean for producers?
There is a huge amount of economics in the article not least some evidence on the oligopsonistic power of banana growers and the oligopolistic battle for market share among the major retailers:
“Banana production is an operation on a gigantic industrial scale and is dominated by just five huge companies, Chiquita (formerly United Fruit), Dole, Del Monte, Noboa and Fyffes, which control 80 per cent of the global trade between them.”
“Asda - which sells two million kilograms of bananas a week - is charging 46p/kg. On August 25, the price was 84p/kg and 99p/kg last Christmas. Tesco and Sainsbury’s had been forced to match Asda’s price while the cost of bananas at Morrisons has fallen to 57p/kg and 59p/kg at Waitrose.” (Daily Mail)
More here
Olive Oil Producers Suffer from Falling Prices
For the olive oil growers of Spain falling prices are threatening their very existence. They claim that the supermarkets - who sell 9 out of every 10 bottles - have used their market muscle to drive down the retail price and the growers are barely able to justify continuing production. This is a good short video on the workings of the price mechanism.
Strictly Labour Market theory?
One of the most cumbersome terms in Economics is the Marginal Revenue Product of Labour (MRPL), which we encounter during our A2 Micro lessons. The phrase itself is one of those clumsy things that many students find hard to get clear in their minds quickly.
read more...»Information and Consumer Choices - Two Stories
Two stories on the role that information can play in influencing our choices caught my eye today.
The first is a new report from the Food Standards Agency that claims that there is little difference in nutritional value and no evidence of any extra health benefits from eating organic produce. Given that organic food in most of the major supermarkets carries a price premium, will more people decide that, leaving aside ethical and environmental considerations, the supposed health benefits from organic produce has been exaggerated? The recession has made life tough for organic farmers; this report will do little to help them, no surprise that one of the leading stakeholders, the Soil Organisation has laid into the report!
The second is a damming report on the health effects of tanning machines from the International Agency for Research on Cancer - reported here by the BBC - that claims that sunbed use is on a par with smoking or exposure to asbestos. Again an industry stakeholder the Sunbed Association has been quick in putting forward a defence.
Information failure is a key cause of market failure. I suspect that consumers who enjoy flaunting their organic credentials and who swan around with a fake tan have both been conned for many years and spent a small fortune in the process!
Race to the Market - Jacko Tribute Books
Here is a superb example of how profit seeking businesses react immediately to a market opportunity.Barely had the dust settled on the untimely passing of the King of Pop when publishers around the world sprung into action to deliver tribute books - but speed is absolutely of the essence for the publishing trade as the ‘market space’ for Jacko memorabilia is likely to fill up almost as quickly as the O2 arena when his tickets went on sale.
read more...»Petrol price war breaks out
Here is an example of the kind of periodic price war that is characteristic of an oligopolistic market. The Guardian reports that the supermarket chain Asda has cut the cost of unleaded petrol and diesel to 99.9p a litre at all its 176 fuel stations. .Sainsbury’s, Morrisons and Tesco are the other main players in the market, and the Automobile Association believes that they will follow Asda’s lead.
Is Asda really the price leader in the UK petrol retail market - Morrisons has already followed suit by dropping prices to what is considered to be the psychologically important price of 99.9p per litre or less. Most supermarkets engage in price-matching in local areas so if a rival’s prices are going down, then they will go down as well - to some economists this is a form of hidden price fixing.
Or is this move part of a wider phase of price competition across the supermarket chains, using ultra-low profit margins on fuel to entice customers into their stores? The report says that the number of petrol stations in the UK has fallen to about 9,000, from a peak of 30,000 three decades ago and that smaller independent petrol stations would struggle to match the firepower of the big supermarkets. A 2p drop in the price of petrol saves the average UK family £4.34.
The average charge per litre for unleaded has been 103.8p, ranging between 99.9p and 115.9p.The average for diesel was 105.3p, ranging between 99.9p and 117.0p.
Unintended consequences of painkiller innovation
The retail price of over-the-counter painkillers fell sharply a few years back when one of the last legal price-fixing agreements covering pharmaceutical products came to an end. Within days the cost of a packet of soluble aspirins had halved as supermarkets rushed to bring their own-label products to the market space. Cheaper pain-killers have been a benefit to millions of people who paid over the odds to chemists and Big Pharma for cold remedies and relief from the pain of toothache and other ailments. But one of the unintended consequences of tough competition in the market has been the emergence of yet more powerful tablets.
How many of us when faced with an array of cold-remedies now opt by default for the ‘extra strength’ variety? The manufacturers know that putting simple phrases such as “new improved”, “maximum strength” and “fast acting, dual action” on the packets are often enough for consumers to trade up to strong pain-killing products and pay a premium price.
But one of the consequences of research and development in the over-the-counter market for pain remedies has been growing evidence of consumer addiction. John Gapper writes about this in this blog.
Codeine present in many products such as Nurofen Plus and Solpadeine Plus in particular is causing great concern. A House of Commons report published earlier on this year recommended that painkillers containing codeine should be sold in smaller packets and available only after consultation.
King of Shaves takes on Wilkinette
Will King, Founder and CEO of the fast-growing King of Shaves brand gave a superb presentation to the National Conference for Economics Teachers in London last week. The business was founded in 1993 and sixteen years later King of Shaves is making significant in-roads into the market for male and female shaving and grooming products. The battle against Wilkinette is well and truly joined but - as with most entrepreneurial success stories - the challenge of establishing a foothold in an oligopolistic market dominated by two corporate giants has not been smooth.
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