Tuesday, February 5, 2008

Retail Markets - 7

You can't tell based solely on the observation that the item is in short supply at the place where you are shopping. You could shop elsewhere to see if the item is in short supply there. And you could talk to others, either managers in the store or other consumers who have shopped elsewhere to compare your experiences. In this way you could get a better picture of what is going on. But note that this information is not reliable unless a lot of it is obtained, in which case the gathering is time consuming and hence costly. Indeed, while the store should know when it is next taking delivery, it too may be unable to distinguish general excess demand of an item from a run in that particular store.

We need one more idea and then we'll be ready to address our core questions. The issue is understanding how retailers set prices and the forces that cause retailers to adjust their prices. Price is determined not just by current cost and demand conditions. The historical price matters. Sellers, particularly those with a large base of loyal customers, are loathe to raise price in times of shortage for fear that they will be accused of price gauging and thereby damage their goodwill with their customers. Customers are owed a "fair price" which is tied more to the procurement cost than to the opportunity cost of the item under shortage.

See this piece for an argument that many consumers think they are being price gauged by sellers.

Can you recall ever feeling that you were overcharged of by a seller? If so, how did you react? Did you continue to patronize that vendor?

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