Ethics has nothing to do with it. It’s a simple business decision. Once again I have to point out that companies are not formed in order to employ people. Employment is a consequence of
Heaven forbid that a country does something differently from the US.
That was actually my starting point here. I coulda sworn there were laws against driving competitors out of business by pricing below cost, but minty says there aren’t, and he ought to know.
I realize this is getting off the subject, but to me, the absence of such laws is crazy. If I’m a businessman who is considering competing against a much bigger entity, how can I compete if they can blow me out of the water by selling below cost until I can’t afford to stay in the game?
I’ve got no problem with the idea that the big company may be able to run me out of business simply because they’ve got a lot of experience, and have economies of scale and whatnot working for them. Presumably, I wouldn’t try to compete with them if I didn’t think I had an answer to that, and if I’m right, I win, and if I’m wrong, I lose; that’s how the market works. That’s Adam Smith’s invisible hand, doing what it’s supposed to do.
But the ability of a company to drive a competitor out of business by using its bigness to sell under cost has nothing to do with Adam Smith or fair competition. It has to do with using bigness to stifle competition.
Like I said, this is an aside. For purposes of this post, I’m not saying anything specific about any specific company.
In terms of market forces, I don’t see that that’s a problem, Thea. If WallyWorld isn’t willing to sell that $40 pair of jeans, you can bet that if such a product is profitable, someone else will fill the niche. The free market does tend to work that way.
But from a practical standpoint, I’m not really worried, based on my personal experience. I buy Wrangler jeans for $15 a pair at K-Mart, and wear them to work. After several months, they’re fading a bit too much for me to want to wear them to the office, so they become my casual jeans. They last for years at that level. Then if they wear out at the knees before they wear out at the crotch, they have a third incarnation as cutoffs.
This may be, but again, I’m not worried about this. People will respond to conditioning. If they have enough bad experiences in a store, they will try to find someplace else to shop. One of the biggest reasons K-Mart is going down the tubes, IMHO, is that you can’t get any help there. If you can’t find what you wanted, or have some other problem, there’s no one around to help. (I pretty much just buy my jeans there, since I know they carry them. Run in, get jeans, check out, leave.)
The Wal-Marts that I go to have lots more sales help than K-Mart; even right before Christmas, I could generally find a clerk when I needed one. I’m sure they try to find what they feel is the ‘right’ level of service - to try to have the absolute minimum number of employees that will make me feel like I can find a clerk if I need to, and not wait too gawdawfully long in line, without spending a dime more on payroll than they have to.
That again is the rationality of the market, and it’s a good thing. (That is, so long as it doesn’t slop over into pressuring employees to work ‘off the clock’, which Wal-Mart has been accused of, but that’s a separate issue.) If people repeatedly have a sucky time in Wal-Mart because Wal-Mart’s shorthanded staffing translates to a shitty shopping experience, then people will shop elsewhere.
No. But it is unethical to say, “Hey, my little widget factory made ten million in profts last year, but I could make fifteen million if I laid off my entire workforce, closed the plant and opened one in Asia, where I didn’t have to worry about expensive little niceties like safety equipment and, since they don’t have to worry about things like indoor plumbing and electric bills, I could pay them a tenth of what I’m paying my employees here. If they want things like indoor plumbing, well, they don’t have child labor laws over there, so I can have the entire family, including eight year olds who really ought to be in school working for me.”
A company has a moral obligation to the workers who manufacture the products and provide the services that make that company profitable. Most companies don’t get that.
If tought economic times force a company to lay off some of its workers in order to stay afloat, well, life’s a bitch. But there is a difference between economic necessity and flat out greed.
But what about Huffy, who was forced to concede an advantage to its competition because Wal Mart used its bigness to force them into having to re-tool their factories to make cheap, low profit margin bikes? Being forced to streamline processes and be more efficient is a good thing, but when a company has the choice of closing plants and importing cheap crap from Asia to meet the demands of a big buyer or going under, or of losing so much busness because they decide they don’t want to deal with Gargantuan Company X because of their strongarm tactics that they either have to lay off workers or move their plants overseas, well…
Wal-Mart doesn’t seem to get that it costs a certain amount of money for their suppliers to manufacture and deliver the products. A company can only streamline so much, then they have to start accepting a progressively narrower profit margin…
So, if two retailers get on the phone with one another and agree to lower their prices below cost for a period of time, in order to hurt a third rival, that would be illegal. Right? Collusion isn’t it?
In the case of Wal-Mart, they have so much of the region wrapped up, they get a conference call going with the three other Wal-Marts in the same region, lower prices on some products below cost and the end result is the same. Why isn’t this restraining trade?
For markets to work, shouldn’t prices reflect cost and normal profit? Would this be an example of market failure because prices are below cost?
With all due respect to minty, I think he is mistaken about this. I thought that this business practice was one of the reasons the anti-trust laws were first enacted. I’ll have to do a little research and see what I turn up.
How about http://www.oecd.org/dataoecd/7/54/2375661.pdf
Summary: it’s illegal, but difficult to prosecute, because it is difficult to determine where the line between vigorous competition and predatory pricing is.
I’ll grab my a antitrust volumes from the office and post a summary of the relevant legal principles later this week. It is, however, inaccurate to say that predatory pricing is illegal. As I indicated above, selling products below cost is only problematic in very limited circumstances. The predatory pricer has to be able to recoup its losses by raising prices above their competitive price after killing off the competitor, but that is only possible if the predatory pricing results in a monopoly that can be defended against potential competitors. In most circumstances, that simply isn’t feasible.
I can also hire strawmen to work at my American factory:
They show up late and drunk all the time. It’s like pulling teeth to get half of these guys to do anything. The union bitches every time we try to modernize or retrain any of the employees. This year, they are demanding a 15% raise or they will strike, meanwhile sales have been down for 3 years.
Oh I thought all companies made huge profits and were just greedy? I assume Walmart is like every other warehouse or grocery store. That is to say, they make only a few cents on the dollar of actual profit. They make up for this with volume.I guess that’s too bad that Farmer John will lose his little store because he can’t negotiate the 15% markups any more but as they say, TS. That’s business. In the end, it’s the consumer who benefits from lower prices.
Screw Huffy. You can’t blame Walmart if most people are willing to sacrifice a little quality for a cheaper bike. As I’ve already said, what the hell is the point of buying a $300 bike to criuse around the neighborhood for a kid who’s going to outgrow it in a few years? If a person is into BMX racing or mountainbiking or serious racing, there are plenty of serious bike stores.
And as anyone with any business sense will tell you, it’s hard to argue with success.
Um, can somebody please point me to a $300 Huffy?
Huffy made $100 bikes. Not high quality, just stuff sold at department stores like Walmart. In fact, here’s where you can find them: http://www.huffybikes.com/locator/. Great bike shops like “Western Auto”. $150 was probably around the top of their line. They got squeezed, shuttered their US factory, and moved production to China. Now they sell $65 bikes at places like walmart.
As for “there are plenty of serious bike stores”, I’ve already addressed that. There’s 30% less than there were 5 years ago, and based on current sales (note: not projections!), which are 50% less than 5 years ago, the number of stores will probably drop another 30%. Store closings are a trailing indicator, ya know.
“Kids”? “Serious racing”? Cite please? Here’s mine: http://nbda.com/site/page.cfm?PageID=34. Scroll half way down, you’ll see a chart on sales by category. Most mountain bikes and cruisers, and just about all hybrids and comfort bikes are sold to adults who just want to ride their bikes places. That’s about 65% of the market. Youth bikes, at 28%, are sold mostly to teenagers, and include BMX and small mountain bikes. Racing bikes are a subset of road bikes, and road bikes are about 5% of the market. In my experience, racing bikes account for less than half of road bikes, so that’s around 2% of the market. “serious mountain bikes” are probably 5%.
Note: for pedants only. Yes, Huffy did have a high-end bike division, airborne. See http://www.airborne.net/. Huffy bought this brand in 1999, and sold it back to its original owners a year ago. Airborne bicycle frames are titanium, and made in China.
Why should we care how many bicycle stores there are? Are people having difficulty finding places to purchase bicycles?
I don’t know anything about the bike industry but thank you for making my point for me. It’s like the “broken window” example they teach us in econ. Bad news for the shopkeeper but good for the window repairman. Huffy is the shopkeeper. The consumer who gets to save $35 on essentially the same bike is the window repairman.
That happens to every industry as it matures. Companies merge and consolidate. Weak players are driven out of business or acquired by strong ones. At one time, there were probably 50 or more car makers.
I don’t need a cite. Your own cite is adequate for proving my point for me.
Here’s what I read:
74.0% of unit sales (35.8% by $) are through mass market channels (ie Walmart) - $65 bikes
9.8% of unit sales (17.6% by $) are through sport chain stores and “other” (ie Sports Authority) - $157+ bikes
16.2% of unit sales (46.6% by $) are through specialized dealers - $200+ bikes
This tells me a couple of things -
There is no place for the mid range, and that’s where you’ll lose if you want to step up from a $65 walmart special into a real bike, but not spend $2000. You may have a hard time finding a decent local shop that can sell and service that.
So the $65 walmart special is great for people who don’t ride (which is a bit ironic - why buy a bike that is so horribly designed, built and serviced that you won’t want to ride it), it is bad for people who do want to ride, as it reduces choice in the market segment one or two notches up from Walmart “quality”.
But let’s get back to my first response on this. Somebody posted that “Walmart sells cheap crap”. While I happen to agree, I don’t blame walmart for this. Walmart sells what the American buying public wants, and in general, Americans shop on price, quality be damned. In other words, Walmart’s cheap junk is a symptom, American buying habits are the cause.
In other words, we are in violent agreement. I also pointed out that the majority of a population buying on price alone tends to polarize markets, as it leaves no room for profit in the mid-range. Your points above bear that out. I’m not passing judgement whether this is good or bad, simply that it exists.
Forcing customers, many of them poor, to pay more for products so that some Americans can continue to get a paycheck at the expense of some foreigners who need it more, now, that’s unethical.
Europe has more stringent regulations and higher taxes to pay for socialized health care and other social services than the USA. As a result US businesses have lower costs. Should Europe be allowed to refuse to buy American products and prohibit outsourcing to the USA until such time as America meets Europe’s definition of “fair”?
Europeans are not forced to buy American products.
As for the more stringent regualtions and higher taxes…
There should be minimum conditions that must be met concerning worker safety, environmental regs, etc.
I think American citizens will begin to insist more and more that lawmakers pass protective tariffs. I think that would be, in the long run, bad. If multinationals voluntarily followed safe labor practices and took measures to protect the environment in other countries, that would be better in the long run for all.
Don’t be ridiculous. I had no problem whatsoever buying my wife a $350 Trek for her birthday last year. Got it from a local bike shop less than three miles from my home. Unless you have any actual evidence that folks are having difficulty finding those mid-range bikes, I’m just going to have to call shenanigans on that claim.
Used to be 6 bikes shops within reasonable distance of here. Now there are 2, one of which ain’t such a good choice. Call it what you will, the stats aren’t on your side.
So then you’re saying that it’s still perfectly possible for you to buy a mid-range bike from two different shops within reasonable distance of you?
Damn you Wal-Mart! Damn you to hell!
Yep, because the market for bikes, while basically stagnant, has shifted towards $65 bikes. Walmart et al have gained 15% of the total market share, bike shops have lost 15% of the total. The trend shows no signs of reversing. Give it another 5 or 10 years, and those other two shops will disappear, perhaps to be replaced by a shop that deals in high-end (i.e. $2000+) only.
I have consistantly stated that I don’t blame walmart.
The question of whether it is an antitrust law violation to sell of a particular product or category of products at an an artificially depressed price was addressed by the U.S. Supreme Court in MATSUSHITA ELEC. INDUSTRIAL CO. v. ZENITH RADIO, 475 U.S. 574 (1986). The court observed:
In short, to show that Wal-Mart was engaged in illegal predatory pricing by below-cost toy sales, there must be strong evidence that Wal-Mart would have sufficient market power to artificially increase its toy profits after eliminating its competitors.