I walked in to a local downtown drug store-it was part of a nationwide drug chain. I was surprised to find things SIGNIFICANTLY more expensive than in their suburban location, near my home. For example-a candy bar that cost $0.60 in the burbs was $0.85 in town! A box of envelopes was about 15% higher in the city location. Which leads to my question: do retail chains compensate for their shoplifting losses (in urban locations) by jacking up retail prices? I have heard 9informally) that inner-city businesses have high theft losses, and often cannot obtain insurance-so do the inhabitants pay more to compensate them? the price differences are huge-its another example of how much higher the cost of living is in the inner cities.
How much do you think the retail establishment is paying per square foot in lease costs downtown, vs. their costs in the suburb?
So you’re asking if a store with a high amount of theft would charge more to compensate for the theft? Of course they would.
It’s called “shrinkage”. And definitely companies have to consider that in their cost of doing business.
Consider this: a firm is earning profit of, say, $1 by charging 2¢ per item. Why? Would it increase its profits by charging 4¢ per item? Presumably not, because if the firm could increase its profits that way, it would have done so already, no? Presumably the firm charges 2¢ per item because that’s the profit maximizing price and changing the price would only lower profits.
Suppose the firm now discovers it’s losing money from theft. Will it suddenly be able to increase profits by charging 4¢ per item? Why would it be able to? If the firm was profit maximizing before we introduced theft, why can an arbitrary price change recoup those loses?
It may be possible that theft is worked into the price; however, I haven’t been shown a good reason to think it’s optimal.
Sounds like a supply-curve demand-curve problem to me. Shoplifting has generally no effect on the demand curve, (why should I change my shopping priorities because other people are stealing?) but it would tend to increase the supply curve slightly… the costs incurred are not generally on a per-sale basis, but the more business a store is doing, the more items they have out for sale, the more opportunities there are for a thief to swipe something.
So, what happens when the demand curve stays where it is and the supply curve shifts up slightly? A new equilibrium point is found, generally upwards and to the left. So prices increase slightly and sales drop a bit.
And a narrow stripe, indicating the gap between the old supply curve and the new supply curve to the point of equilibrium, indicates the value of what’s stolen. Do I have that right, or am I thinking of another kind of graph?
Come to think of it, this pretty much resembles the analyses we did in intro econ of the effects of instituting a sales tax. Which kind of answers the OP question in a weird way.
I believe Bricker is correct. If I go to a Rite Aid in the suburbs of Bucks or Montgomery county, things will be cheaper. If I go to a Rite Aid in center city, or University city (areas of downtown Philadelphia) things will be more expensive. Rent is more downtown. Prices must be increased to cover this.
I was surprised to learn that a mom and pop corner grocery in University City was cheaper on most items than a huge monstro mart. I had assumed that higher volume of sales would translate into lower prices. The reality is that the mom and pop grocery was located no place special. The monstro mart is opposite a popular and well known upscale cafe, and upscale movie theatre. The monstro mart is also close to a major transit line. It’s prime commercial real estate, and the prices reflect that.
Ahhh, but there’s more than rent at work there. You and Bricker are not accounting for the fact that you can charge more in higher rent areas in part because of price discrimination; that is, the clientele in such areas can, and will, pay slightly more for many products than would the clientele in Bucks County.
Indirect costs generally do not affect price. They can’t, because they don’t have a direct bearing on the optimal point in the supply-demand intersection. The higher prices in higher rent areas are largely a product of the fact that the demand curve there is simply different. Richer customers. You can charge more, so you will. The facts that both your rent and your prices are high are both effects of the same cause.
Put it another way; if you could locate your drug store in a high-rent area and somehow avoid paying any rent at all, would you lower your prices? Of course not. You’d still charge the slightly premium-level retail prices, because that is what the market will bear.
The effect of shoplifting is somewhat different. Shoplifting is generally proportional to the amount of display stock a store has; Wal-Marts, which are big and have copious amounts of stuff available for stealing, are plagued by shoplifters, while small stores are proportionately less attacked by thieves. Shoplifting in effect raises the marginal cost of the product, since you can expect that of any given product you ship in to the store and display, X% will be stolen (it varies from product to product, of course; candy bars are stolen a lot, but people don’t often steal Jacuzzis.)
Hmm. That made me think of another factor. In the suburbs, people have cars. They live within easy drive of several stores and will go to whichever is currently the cheapest. Downtown, many people do not have cars. Monstro mart can charge more because there is no other full size supermarket for at least several miles.
I actually know the answer to this because I used to be a corporate manager at the headquarters of a major New England supermarket chain with an urban and suburban presence. Other people have already listed most parts of the answer. Shoplifting isn’t the key factor in setting different retail prices for different areas. It may have a small impact but it is mainly caused by:
- Higher operating costs in the city.
- A more captive customer base in the city. People may have to walk or take public transportation and they are used to higher prices overall.
Raising prices in the face of shoplifting isn’t a good strategy. What companies should do in that case is control the shoplifting. Urban stores often have a greater security presense because of this.
Letting shoplifting dictate prices is bad. It can make a store uncompetitive and generate resentment among the majority of customers that do not shoplift.
Shrinkage allowances are built into the cost calculations for all retail goods. This includes damage as well but companies don’t simply let the goods walk away and adjust prices upward the more it happens. That is simply bad business.
In many US cities, the downtown area is also a ghost town outside of M-F 9-5. I’m thinking this can also have an effect on prices.
This is probably part of it, too; I know when I went to university, the local stores were infamous for charging inflated prices, since students generally did not have access to easy transportation to shopping alternatives.
Draw out the graphs and see if your verbal reasoning matches what the graphs show.
Actually, this misses one of the biggest factors in determining commercial rent: traffic (that is, the number of potential customers that go by the store, not the backups on the roads leading into the store).
If a store is located in a high-traffic area, the rent is likely to be higher because the store will have more potential customers that it can convert into sales. With more potential sales, there is the possibility of higher profitability. As a result, landlords can charge higher rents, which tenants will be willing to pay because they can be profitable nonetheless.
Even if the prices are the same at low-traffic suburban stores and high-traffic urban stores, the higher rent can be more than made up for by higher traffic.