The Price is Right? Not at Some Firms
Inflation has been trending downward for some time now--one broad measure has it as low as 1.3%. Nevertheless, prices remain much in the public’s consciousness. Some businesses are cutting them, others are raising them, and many on both sides probably are making a mistake.
On the price-cutting side, department stores have treated consumers to a wild holiday season. A period that used to be marked by an absence of off-price deals now has become the heaviest mark-down period of the year. Some stores have offered price cuts on top of price cuts--50% off for fine jewelry, for example, with another 10% thrown in on special days; 30% mark-downs on clothing with storewide discounts added to that.
The Broadway has had so many “one-day” sales that some of the stores don’t bother to take down the signs. They just cover them up occasionally.
There are two reasons for this year’s heavy discounting. One is the number of mergers and store closings in the retailing industry, creating new opportunities to battle for an added share of the market. The other is the desperate and perhaps excessive effort to squeeze some growth out of holiday sales in the face of an economy that isn’t supporting much growth right now. Consumers’ credit card balances were high going in. Last Christmas was a disappointment, and indications are that the gains this time are similarly small.
From a consumer’s point of view, it may appear odd to complain about lower prices, but there is a dark side to this activity. It is making it increasingly difficult for consumers to know when, if ever, they should pay full price for an item, indeed what is a true full price. It was fairly common these past few weeks to buy a ready-to-wear outfit on a special 30%-off sale one day only to return to discover the same item even lower-priced a few days later. Some stores have gone to letting shoppers bring back sales slips to get the added discount.
Some of the discounting is so extreme as to raise a question about the legitimacy of the so-called original price. Take that fine jewelry sold so often at 50% off. Was it ever truly priced at twice as much? At some smaller shops, the pricing was even stranger. One store sold Italian sweaters with a price tag reading $325 for only $49.99. Did the store ever get $325 for any of those sweaters?
The discounting furor is rapidly putting department stores into the same class as car dealers--sticker prices are usually well above what any car buyer should pay.
Such pricing confusion hardly seems to be in the best interest of the stores or their customers. If 30%-off sales are so common, then it must be that the price of the merchandise was too high to begin with. Maybe the stores would be better off lowering prices more moderately but keeping them down.
On the other side of the pricing picture, a number of industries continue to boost prices as though they haven’t awakened to the disappearance of general inflation. They are taking more risk than they realize in doing so.
Examples are health care, where costs are still inflating at the rate of nearly 8% a year; college tuition, rising more than 7% a year, and new car prices, climbing more than 5%. There are others, ranging from legal services to media advertising rates, that continue to exceed general inflation. In some industries, the process is ennobled by calling it “aggressive pricing”--attempting to get the most a market will bear.
A number of factors are involved in these decisions, but a big one is a reluctance to recognize that trying to meet artificially high profit goals can be self-defeating. Every time an item or a service gets costlier relative to all others, demand for it is likely to decline.
Sometimes the impact is slow to develop, as it was in health care, where consumer price resistance is modified by the fact much of the cost is paid by a third party, the insurance company. Yet it is evident now that even doctors and hospitals are suffering some market shrinkage. The same is true of private colleges, hungering for students, and of media, where advertising growth has lagged behind the general economic recovery.
After years of high inflation, the lack of it takes some getting used to.
