South-Western College Publishing - Economics  
Big Brother? No, just Sam Walton
Subject Wal-mart keeps significant amounts of information about its consumers.
Topic Profit maximization and the firm; Production and Costs
Key Words

Wal-Mart, Sam Walton

News Story

Wal-Mart has about 3,600 stores in the US currently, with about 100 million customers each week. As a result of all those purchases, Wal-Mart has about 460 terabytes of data on their consumers' buying habits. Perspective: That's more than double the amount of information contained on the Internet, and equal to about 460,000 gigabytes of data.

Why? Ultimately, Wal-Mart tracks its purchases to reduce costs. It knows exactly when the store in your town will begin to run out of a particular brand of toilet paper, and when the peak buying season for motor oil is for that store. This information is fed into a huge computer model, which then allows the company to tailor its inventory distribution so that it has the products heading to the store just as it's beginning to need the replenishment.

Fifteen years ago, Wal-Mart spent about $4 billion on its computing system, and creating inventory systems that could be integrated with the computers' database. Wal-Mart is very private about its data, although it does share what it knows with its suppliers, so they can see how well - or how poorly - their products are doing, and at what particular stores. This creates greater efficiency in its inventory system.

This also allows Wal-Mart greater efficiency in its pricing system. Knowing the combinations of goods people purchase rather than the individual goods people prefer offers the company the ability to keep the overall bill much lower, as it advertises. That way, it doesn't have to keep all goods at the lowest prices.

Having this level of information is not without its drawbacks, however. When six women filed a gender discrimination lawsuit against Wal-Mart in 2001, the courts determined that the computer system could be used to calculate back pay. It could also be used to determine whether women were unfairly left out for promotion opportunities.


Questions
1.

Does Wal-Mart's computer system allow it to engage in price discrimination? Why or why not? What do we call a system in which a single buyer has disproportionate market power? Do you think this term applies in this situation?

2. Wal-Mart allows its suppliers to have access to its voluminous database so suppliers can track its own products. If you were making the decisions at Wal-Mart, would granting this access cause you to pay more or less for the suppliers' products? Why?
3. How can such an extravagant investment in computing technology be profitable for a company like Wal-Mart? Explain, using examples from the article.
Source Constance L Hays. "What Wal-Mart knows about customers' habits." The New York Times.. 14 November 2004.

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