Shopping Around For RETAIL PRICES
It's time for another one of our frequent stops at Mr. Market Super Food Discount Store, this time to check out the story behind retail prices. As consumers, we spend a large fraction of our nonworking, nonsleeping lives wandering grocery stores aisles, searching clothing store racks, and surveying department store displays for the right product at the right price. How do we know, like the name of the long-running game show, if "The Price is Right?" How are retail prices set and do they really tell us the value of a product?
The Theory of Prices
Pointy-headed economists are fond of noting that prices are set through the interaction of demand and supply. Buyers want "stuff" and are willing to pay for it. Sellers are willing to part with this same "stuff" if paid enough. The market, in its naturally ingenious simplicity, allow the buyers and sellers to trade this "stuff" at a mutually agreed on price. Participants negotiate over price and quantity until everyone is satisfied. Is this the way it works at your local retail store?
Negotiating Catsup Prices?
Imagine if you will, wheeling a cart filled with stuff to a harried checker at the Mr. Market Super Food Discount Store. Our harried checker is a hard worker, but to be honest, is counting the minutes until day's end. As each product is placed on the counter, you make an offer, which is then met with a counter offer by the checker. The negotiations bounce between you and the checker, with the checker occasionally conferring with the store manager over a marginally acceptable/unacceptable offer. After several days, you proudly leave the store with a cartful of spoiled meat, melted ice cream, and stale bread, but a set of prices that are agreeable to both you and the retail store.
Clearly, retail stores can't operate this way. The cost of negotiating prices for each transaction would be incredibly high. Retail stores post the prices -- frequently based on a manufacturers suggested price -- that they think will cover the costs of supplying the products. Consumers then select the stuff that they're willing and able to purchase at the posted prices. For most retail prices, little or no negotiation takes place.
This, however, doesn't mean that negotiating, in one form or another, is absent. Consumers do their "negotiation" by shopping around the competition and offering repeat business. Retail stores "negotiate" by adjusting prices in response to sales. If consumers buy a retail product at the posted price, then the price is acceptable, if they don't then it isn't. Stores -- at least the profitable ones -- recognize sales as the degree to which consumers are pleased with prices. If sales are low, then they drop the price. The lowest price they'll set is that needed to pay their costs of production (unless they're just trying to rid themselves of excess inventory). If sales are high, then they raise the price as high as the competition will allow.
Negotiation for the Few
A small number of retail products are subject to one-on-one negotiation because there is but one buyer and one seller. In contrast to a retail grocery store that has scores of buyers for each type of product on a given day, a car dealership generally has only one prospective buyer for a car. For example, you might be willing to pay as much as $20,000 for an OmniMotors XL GT 9000 sports coupe, but of course would like to pay less. A car dealer, however, needs to get at least $15,000 to cover costs, but of course would like to get more.
So, what happens? You and the dealer toss potential prices back and forth until reaching one that's mutually satisfactory. Is that price likely to be closer to $15,000 or $20,000? As we saw in Fact 4, Our Monopolized Markets, the answer to that rests with the relative negotiating power of each side. If you're a shrewd buyer you can get the price very close to, or right at, the dealer's $15,000 minimum. The more skillful the dealer, on the other hand, the closer the price is likely to be to $20,000.
This suggests two important consumer tips:
Consumer Buying Tips for Big Ticket Items
- When buying a car, house, or similar product, try to determine the seller's cost of production. Magazines, like Consumers Reports, regularly provides cost information for new cars and going market prices for used cars. The going price of housing can be easily obtained through local real estate agents.
- When selling a car, house, or similar product, try to determine the highest price prospective buyers would be willing to pay. While this is likely to be different for each buyer, the prices of comparable products on the market provide a first approximation. As a seller, you need to know if the prospective buyers can get the same product cheaper from someone else.
Different Prices for Different Folks
According to our pointy-headed economists, negotiation and competition among numerous buyers and sellers should equalize the prices of similar products. You would not expect to buy a bottle of Omni catsup at Mr. Market Super Food Discount Store for $1.59, while an identical bottle can be found at Mega-Mart Discount Warehouse Super Center for $1.39. This economic logic seems impeccable, doesn't it. Why would you pay an extra twenty cents for catsup from Mr. Market when you don't need to? If you don't pay, then Mr. Market can't charge $1.59 and is forced to meet Mega-Mart's $1.39. This is what we mean by market competition.
However, retail prices of identical products do vary from store to store. Do you think that stores are unaware of the impeccable logic offered by economists? This need not be the case because there are other very sound reasons for store-to-store price differences.
- Convenience. For retail products, consumers are less concerned with the price of each and every product purchased from a store, and more concerned with the final tabulation. Sure, the catsup price is 20 cents more at Mr. Market Super Food Discount Store, but mustard is 25 cents less.
- Search costs. It's very costly to keep track of the prices of the hundreds of products purchased at retail stores. It might take you ten minutes to scan all of the shopping circulars just to note that a few pennies can be saved on the price of catsup. The time spent finding the lowest prices of every product purchased is seldom worth the effort.
- Transactions costs. It's also very costly to actually buy different products at their lowest price. Even though Mega-Mart charges 20 cents less for catsup, it's located half-way across town. It might cost 30 cents worth of gasoline, and an hour of valuable time, to save this 20 cents.
- Consumers' incomes, preferences and other things. Many retail stores cater to a particular cliental because consumers don't want to drive all over town searching for a bottle of catsup. Stores, to some degree, have a captive customer base. Since some consumers are willing to pay more for a given product, each store sets the prices that it's regular customers are willing and able to pay.
The bottom line -- different stores charge different prices because they can. Let's check out another common bit of pricing that's based on this because they can theme -- gasoline.
Those Rising Holiday Gas Prices
It never fails. You're headed out of town for that long awaited vacation and pull into your favorite source of petro. If you hadn't noticed the price on the thirty foot sign, or the one on the pump, by the time you pay the cashier you realize that the price is several cents higher today than it was yesterday. Sure you grumble, perhaps even complaining to the innocent cashier -- who is only trying to make it through the day without being shot -- but you whip out your credit card, sign the receipt, and continue on your not so merry way.
Another victim of price gouging on the part of BIG OIL? Perhaps. The oil companies, however, have very little to do with the higher price that you pay right before the holiday. In fact, gasoline stations charge a higher price directly before and during periods of peak holiday travel because they can. They anticipate an increase in holiday travel, knowing from past experience that motorists will grumble a little, but still buy the needed gasoline.
This thought gives us two more tips, one that's almost too obvious to state and a second that's much less so:
A Few More Consumer Buying Tips
- Fill up your gasoline tank before the holiday travel rush.
- Be a contrarian -- don't buy when everyone else does. If an increased demand for a given product raises its price during some periods of time, don't buy at that time. Buy your gasoline a few days before the holiday. Have your old air conditioner checked or a new one installed during the fall or winter, with the reverse holding for your heating system. Build you a new house during the slow winter construction months. And the list goes on and on.