Economics Dictionary of ArgumentsHome
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| Retail price: The retail price in economics is the final price at which goods or services are sold to consumers in the retail market. It includes the cost of production, distribution, and any markup added by retailers to cover expenses and generate profit. The retail price is typically higher than the wholesale price, which is paid by retailers to suppliers. See also Price, Selling price, Buying price, Trade, Economy, Competition, Information, Cost, Stock keeping._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Economic Theories on Retail Price - Dictionary of Arguments
Henderson I 72 Retail price/Economic theories/Henderson/Globerman: (…) [sometimes] manufacturers require that retailers charge a minimum resale price for the manufacturers' products. For example, manufacturers of expensive watches, such as Rolex, often request stores selling their watches to set their prices at or above a specific minimum price. Limited competition: This practice is clearly a strategy to limit price competition in the retail market for, say, Rolex watches, which, in theory, should be bad for consumers. Another example is territorial restrictions whereby a manufacturer gives an exclusive right to a specific retailer to sell the manufacturer's product in a particular location. By limiting competition among different retailers in the location, the manufacturer is seemingly limiting price competition for the product in question, which would also seem to hurt the consumer. Problem: Why do manufacturers sometimes find it in their interest to limit competition in the "downstream" or retail segment of their industries? It doesn't make sense on its face for manufacturers to want retailers of their product to compete less. After all, if the manufacturer of a fancy watch wanted to straightforwardly exploit its market power, it could charge the retailer an above-competitive wholesale price and exploit its privileged position directly in the price it charged to its immediate customers, i.e., the retail stores that sold its watches. Lester G. Telser: The first economist to explain this paradox was Lester Telser of the University of Chicago in his 1960 article "Why Should Manufacturers Want Fair Trade?"(1) UCLA School: Members of the UCLA School expanded on Telser's insight. Telser and the UCLAers shed important light on the rationale for practices that seemingly limit competition at the retail level by again appealing to real-world conditions surrounding market exchanges.(2) Cost of information: Specifically, information costs play a prominent role in helping us understand business practices such as territorial restrictions. Consider, for example, why a company such as Caterpillar, that makes very expensive earth-moving machines, might assign exclusive rights to specific retailers to sell and service its machines in particular locations. A customer spending hundreds of thousands of dollars on a piece of equipment wants to be confident that the machine will work as advertised. Furthermore, he wants to be confident that if anything goes wrong With the machine, it will be serviced quickly and properly. Henderson I 73 Now imagine that Caterpillar allows a large number of dealers to sell its earth moving machines. (…) imagine it will sell its machines at wholesale to any retailer willing to pay the wholesale price. The task of vetting the retailers of Caterpillar's machines will then fall to the potential customers. Imformation/incentives: While word-of-mouth and other sources of information can help inform potential customers about which Caterpillar dealers are more or less reliable, individual retailers have an incentive to free ride on the efforts of other sellers of Caterpillar machines to provide needed services. Service: Such efforts include holding inventories of replacement parts to facilitate quick and lasting repairs. Those dealers Who save money by free riding can afford to charge somewhat Iower prices than dealers Who provide the full set of services that are complementary to the sale of a very expensive piece of equipment. The incentive to free ride exacerbates the problem facing customers who want to do business with a "high-quality" dealer and are will-ing to pay for the high quality they receive. Customers: Specifically, potential customers must determine whether and to what extent a Iower price charged by one dealer relative to another reflects a more effcient operation of the former dealership rather than Iower quality after-sales service. Cost of information: The costs of gathering and evaluating information about the quality of different dealerships are likely to discourage some, perhaps many, potential customers from buying an expensive Caterpillar machine and cause them to buy a cheaper alternative. Henderson I 74 Exclusive rights: Conversely, if Caterpillar assigned a single retailer in, say, the province of Alberta, the exclusive right to sell and service Caterpillar products, the free-rider problem would be significantly mitigated. The retailer holding the exclusive franchise in Alberta would have an incentive to sell Caterpillars while providing the full range of services that customers desire and are willing to pay for. Quality: Customers who want higher quality machines will be better off under the exclusive territorial arrangement than they would be if Caterpillar sold its machines at wholesale to any would-be dealer of its products. >Service, >Information. 1. Telser, Lester G. (1960). Why Should Manufacturers Want Fair Trade? Journal of Law and Economics 3 (October): 86-105. 2. Klein, Benjamin, and Keith Leffler (2009). The Role of Market Forces in Assuring Contractual Performance. Journal of Political Economy 89, 41: 615-641._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Economic Theories Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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