South-Western College Publishing - Economics  
Yes, Virginia, that is a cheap flat-screen TV!
Subject prices of flat-screen TV sets are falling as the Christmas season begins
Topic Supply and demand; Profit Maximization and the Firm
Key Words

price, supply, flat-screen TV, production, markup

News Story

As the Christmas buying season gears up, one thing is notably heading down: flat-screen TV prices. Some TV's, such as Sharp 32-inch LCD TVs that debuted at the beginning of the year at $5,000 are now selling for $4,000 or less. Competitors are selling for less than $2,000.

Manufacturers themselves contribute in large part to the falling prices. The world's LCD screens manufacturers are producing more screens than the industry can sell, causing wholesale prices to fall by about 30% recently. Further, these manufacturers are racing each other to build new, state-of-the-art machines, leap-frogging one other with technological advances. These technological advances are costly to develop, research and test prior to distribution.

Manufacturers argue that retailers aren't doing enough to promote the new product. They are calling on retailers to reduce their profit markup--in some cases as much as 40% of the total price-- allowing flat-screen TVs to become more of a mass-market item rather than a niche product.

Retailers argue that higher prices are warranted, in light of high advertising and display costs. Since electronics stores spend a significant amount of time and money training sales staff about the differences between flat-screen LCD and plasma TV's, the stores need to recoup those costs through higher retail prices. But higher retail prices prevent more people from buying the new technology-which irks manufacturers. Further, retailers argue that even as the sales prices of these TVs are falling, retailers' after-cost profit per unit continues to fall because retailers are taking relatively small markups.

Flat-screen manufacturers still face competition from other technologies, including the next generation of more efficient TV screens. Once these new production processes come online, expect prices for flat screen LCD TVs to fall even further. And then perhaps flat-screen TVs will be as ubiquitous as VCRs once were.

(Updated December, 2004)


Illustrate how reduced wholesale prices have affected flat-screen TV manufacturers with a graph of supply and demand.

2. The article also discussed the millions of dollars in research and development these firms undertake in constructing the next generation of TV screens. Why can't manufacturers recoup these costs in the form of higher wholesale prices?
3. Would you expect the retail price of flat-screen TVs to fall during the Christmas season? Why or why not? Use economic reasoning to support your answer.
Source Evan Ramstad and Gary McWilliams. "Flat-TV prices are falling." The Wall Street Journal, 3 November 2004, B1.

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