4/12/2007

Is Wal-mart a monopsony?

Traditionally a monopsony represents a buyer who buys less in order to force prices lower. Wal-mart uses their huge buying power to force prices lower. On the surface, this appears as a benefit to society and the end user or consumer appears to have an increased surplus – in the short run. I challenge that it in fact is a detriment to society. Wal-mart prides themselves on being the low cost leader and driving prices down. In order for a company to continue to have their product sold through Wal-mart, they must continue to cut their own costs in production. There are only so many cuts that can be made, and still make a profit, before the quality of the product starts to suffer. End user surplus is not increased in the long run due to cheaper products falling apart sooner and increasing the ‘durables’ replacement frequency rate. So the low price, cheap deal is not always the best deal. For an example, if I buy a pair of levi’s (red tag) at Target I will pay $50 and they will last a good six months. If I buy a pair of levi’s (orange tag) at Wal-mart for $30 they will last less than three months. So in one year I can spend $100 or $120 for the same time coverage for a product. Levi started the color tag to differentiate its product because it could not meet Wal-mart’s demands on price and keep its high quality standards, so it created a new lower standard for their product sold only at Wal-mart and continued to keep its high quality product that was sold at other retail outlets. If you go to Levi’s website , they won’t even list Wal-mart as a retailer that sells their merchandise. there is a point where a good name and quality go hand in hand. I hear (from teenagers) the new name is Wal-mart Fall-apart (the same name consumers gave K-mart in the late 80's).

7 comments:

Eric said...

I agree completely with Jada, Wal-Mart pants don’t last as long as pants from other retail outlets. I bought my last pair from Wal-Mart!!! This concept very well could be the down fall of Wal-Mart, if customers feel they sell inferred products. I have stopped buying pants from Wal-Mart and if I feel quality is lacking in other products, I’ll stop buying them as well.

Patrick said...
This comment has been removed by the author.
Patrick said...

What about consumers who do not have a choice? When you are on a very limited budget you may not have the $50 to $100 to fork out all at once on a pair of jeans. The demand curve for these people is different than the one for consumers like Jada and Eric. I think Wal-Mart understands who their customers are and how much they are willing to spend on different items and they price accordingly.

Dr. Tufte said...

I wouldn't call Wal-Mart a monopsonist, although I would say they have monopsony power.

For me, it is unclear whether Wal-Mart is winning or loser the price/value tradeoff. There definitely is one there, but I'm inclined to think they are doing OK on it.

FWIW: I've been pleasantly surprised with Wal-Marts clothes. And incidentally, this is an area where Wal-Mart has had trouble making money because they don't cut as many corners.

Matthew said...

Okay, maybe this doesn't have that much to do with economics, but as a marketing major, I have to say that Wal-Mart is really trying to upgrade their image. I've always thought of Wal-Mart as having a cheap style, but you get what you pay for. I've always thought of Target as a bit higher price, but worth it for a more classy style.

Wal-Mart is trying to upgrade their image but still keep prices lower than Target's. This can be dangerous trying to be a low-cost and high-quality (well, higher than they were previously) provider, but that is a different story. You'll notice a few new changes in Wal-Mart: employees wear nicer shirts instead of vests, there is carpeting in the clothing section, and they have the clothing brand, George. I used to not wear Wal-Mart clothes, but I can proudly say that I now wear George brand all the time!

Jordan said...

Dr. Tufte said:

"For me, it is unclear whether Wal-Mart is winning or loser the price/value tradeoff. There definitely is one there, but I'm inclined to think they are doing OK on it."

I think most people know exactly what quality they're going to get from Wal-Mart's low prices. Though, in Wal-Mart's defense, Wal-Mart offers pretty good quality products considering the prices you get them at. Wal-Mart is trying to serve a market of customers who like low-prices, and they're doing just fine.

Anonymous said...

Wal-Mart is a monopsony. I'm taking a Consumer Education class, and we're learning about the economy now. Wal-mart pretty much comes to mind whenever we discuss things that damage the economy. Anyway,what they do is call a company they want to get supplies from. They ask the potential supplier or company they want to "work" with some questions involving their prices and such, and if you tell them what they want to know then they'll start trying to force your prices to what they want. It's something like that. My dad got a phone-call from them once(he deals with things like this for the company he works at). He told us about it when he got home. They kept insisting on getting some information along the lines of what I mentioned before, and didn't understand that my dad said "We're a privately-owned company, and therefore don't have to give you that information.", and so kept bugging him until he hung up. Later on, other comapines in the area that had decided to "work" with Wal-mart were run out of business--by Wal-mart. Watch Wal-mart: Low Prices at a High Cost. There are more problems with Wal-mart than just monopsonies and such, and this documentary covers a lot of it in a clear way. They may not be a monopoly, but you KNOW they want to be.