The Price of Everything - Eduardo Porter [14]
Like most businesses, Walmart cuts prices only when there are competitors around. One study found that it charged 6 percent more in Franklin, Tennessee, where it had virtually no competition, than in Nashville, where it had to compete with rival Kmart. Critics argue that Walmart decimates communities, forcing local retailers into the ground. The company’s relentless push for the cheapest products has driven many suppliers to relocate to low-cost China, contributing to the decline of American manufacturing. Still, Walmart’s competitive drive has definitely benefited Americans in their roles as consumers. Its impact has been so powerful that, according to one study, the Department of Commerce overstates American inflation by about 15 percent because the sample it uses does not include Walmart’s low food prices.
KEEPING COMPETITION AT BAY
In 2005 Detroit’s automakers—General Motors, Ford, and Chrysler—used a novel tactic to unload their bloated inventories and revive their flagging finances. They offered customers an unprecedented deal to buy a car at the same discounted price they usually reserved for employees. When GM launched its “Employee Discount for Everyone” program in June, sales jumped 40 percent. When Chrysler launched its “Employee Pricing Plus” in July, it sold the most cars ever.
But upon closer inspection, the promotions weren’t such a great deal. A study by economists at the University of California, Berkeley, and the Massachusetts Institute of Technology found that many cars could have been purchased for less before the employee discount program was launched. For a majority of GM and Chrysler models, and a substantial share of Ford’s, customers paid more in the two weeks of the promotion than they could have in the two weeks before its launch. They were simply told they were getting a bargain and they believed it.
If competition is a consumer’s best friend, corporations’ favorite countervailing strategy is to keep consumers from figuring out where they can get the best available deal. Unlike the competitive utopia described in economic models, where consumers can effortlessly compare competing products to make their choices, the real world is plagued with what Nobel laureate George Stigler called search costs. It is difficult for consumers to find out what a given product costs in all the shops in town—let alone everything available on the Internet. It is even tougher if the goods are not identical. This is a shortcoming that businesses can exploit.
For many companies, evading competition is a question of survival. Makers of everything from cars and computer chips to shoes and TV sets experience what is known as increasing returns to scale: each additional microchip costs less to make than the preceding one. Companies can obtain raw materials and parts more cheaply the more they buy. They also share the cost of investments in machinery and the like among more products, reducing the cost per unit. This dynamic presents companies with a challenging conundrum: competition, when operating properly, would drive the price of TV sets and microchips relentlessly down until they were barely above whatever it cost to make the last one. If this were to happen, makers of chips and TV sets would go out of business. At that price, they wouldn’t be able to recover all their costs. Fortunately for them, there are ways to wriggle free to some extent from competition’s constraints. One of the best-known techniques is to make it difficult for customers to understand where they can get the best value for their money.
At the Fairway supermarket in Brooklyn