South-Western College Publishing - Economics  

Woops! Wal-Mart looks for a do-over.
Subject Wal-Mart begins to aggressively cut prices after disappointing post-Thanksgiving sales.
Topic Oligopoly
Key Words

prices, discounts, Wal-Mart, competition

News Story

Wal-Mart tried a different approach this past post-Thanksgiving shopping season: not offering the steep discounts it's offered in the past. The retail giant regrets that strategy now.

Traditionally, the day after Thanksgiving marks the most profitable day for retailers. Most stores take steep discounts to get people in to the stores. The Friday after Thanksgiving is typically the start of the weekend that encourages the greatest amount of price competition among retailers. This year, Wal-Mart tried something new: Instead of offering deep discounts, stores tried a more "balanced approach" in their pricing strategy. It lost; the other major retailers dropped prices significantly that day, and Wal-Mart got burned. Other retailers, such as Best Buy and Target, enjoyed significant gains during that shopping weekend. Wal-Mart had originally forecast sales growth for November of 2-4 percent over last November. Given its poor sales strategy and performance, the retailer had to downgrade its forecast to only a 0.7 percent increase over November, 2003 sales.

Questions
1.

Some people argue that dropping prices on the day after Thanksgiving is a prisoner's dilemma outcome. Based on what happened with Wal-Mart, can you explain why?

2. As firms engage in price competition with each other, continually lowering prices to entice consumers, to what level will firms ultimately lower prices? Why?
3. Based on this information, do you think that Wal-Mart over- or under-estimated its customers' elasticity of demand? Why?
Source "Wal-Mart to cut prices after poor sales," Reuters. The New York Times. 30 November 2004.

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