Tuesday, February 5, 2008

Retail Markets - 4

People who are comparatively time abundant include retirees, the unemployed, and those out of the labor force. Time abundance is not the only determinant of whether people comparison shop. The poor are more likely to comparison shop than the wealthy. (Recall our comment about convenience shopping at other than the best price. Convenience shopping is a luxury that the poor are likely to go without.) Many senior citizens grew up poor during the Great Depression. They may have learned comparison shopping in their youth and it may have become a habit that stuck with them, even for those who ultimately became relatively wealthy. Since many of these same seniors are also retirees, we are unable to identify the cause of their comparison shopping. It could be time abundance, but it also could be habit.

Our little discussion about shopping behavior should make it clear that in retail markets it is more realistic to assume that trade occurs over a distribution of prices rather than at a single equilibrium price. What does that say about price adjustment and our other fundamental questions as applied to retail markets? In order to better answer those questions, let's consider some other salient aspects of retail markets, focusing on the seller side.

Many if not most retail sales are purchases of items that are "off the shelf." In other words, the seller keeps stocks of items on hand and buyers purchase from the stock, reducing the amount on hand. When stocks get sufficiently low, the seller replenishes them. These stocks are referred to as inventory. Most retail sales are purchases out of the sellers' inventory. Some retail sales, however, are different in that they are "made to order." The important characteristic for us in thinking about made to order is that the buyer must wait until the item is ready. In what way does keeping inventory stocks promote overall efficiency? What types of items are likely to be sold made to order rather than out of inventory?

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