The Mysterious World of Pricing
Beware of online liquidation and bankruptcy sale scams. They are just one of the many ways in which pricing swindles are created.
Sticker Shock
At the grocery store and gas station, we all grumble at the prices. Six dollars for a cauliflower, $3.50 for a gallon of gas? Who sets these prices, and how do they do it? It's complicated and, yes, sometimes we are being cheated.
"Trust you? Of course I trust you." (Fingers crossed behind back.)
Price Fixing
Have you ever noticed that when the price of gasoline changes at one station, it changes at all of them? Of course you have. Government consumer watchdogs keep telling us there's no evidence of collusion. Pure coincidence, they say. But, drivers can't help thinking there's price fixing going on.
Businesses getting together and agreeing on prices is illegal. That doesn't mean it doesn't happen.
- In 2011, 21 airlines were assessed fines of $1.7 billion for a massive price-fixing scheme. Among the villains were Korean Air, British Airways, and Air France-KLM.
- In 2012, banks such as UBS, Barclays, and the Royal Bank of Scotland were found guilty of colluding to fix interest rates.
- Bridgestone was one of 26 companies that entered into an agreement to fix prices on numerous car parts. The companies agreed to pay fines of $2 billion.
- In 2023, Canada Bread agreed to pay a fine of $50 million for collaborating with other large bakeries to fix the price of bread. Canada's Competition Bureau found that "various players in the industry worked together to bake an extra $1.50 into the retail price of bread over at least 16 years" (Canadian Broadcasting Corporation). The investigation continues.
Common Price Rip-Offs
Marketing can be described as the ability to persuade people to buy things they don't need at prices they can't afford. Some examples, please professor:
- Extended warranties: consumerreports.org tells us, "In nearly every case, it's not worth the extra money when buying electronics and appliances."
- Movie popcorn: The mark-up is often 100 percent. You don't have to eat it.
- Telephone sales: Never, ever, ever buy anything over the telephone.
- Timeshares: Vendors use high-pressure sales techniques to close deals that are almost never worth the money.
- Bottled water: Most of us have already paid for tap water but insist on buying the stuff in a plastic bottle because we've been led to believe it's better. It rarely is.
- Online gambling: Don't. Just don't.
- Payday Loans: Interest rates are astronomical and these outfits should never be used.
Payday loan customers never smile.
Walmart Pricing
The Walmart mantra is "Every Day Low Prices." The company's entire marketing campaign is based on creating the belief that its prices are the lowest. Certainly, Walmart has lower prices than its competitors; not on everything, but on most things. So, it scoops in a quarter of all the grocery store dollars spent in America. But, there's a hidden cost that very few Walmart customers think about.
Because the company is so huge, it can bully its suppliers into dropping their prices. This gives rise to something called the "waterbed effect;" press down in one spot and the bag of water rises somewhere else.
The company forced to sell at cost or even below cost to Walmart must make up its losses by charging high prices to its smaller customers. At Time Magazine, Alana Semuels explains what happens next:
“The higher-priced stores struggle, lose customers and go out of business. Then the big box stores, their dominance established and their competitors wiped out, raise prices ...”
Walmart also keeps its prices low by paying its staff poorly. With 1.6 million workers, the company is the largest employer in the United States. Writing for The Guardian, Michael Sainato notes that "Walmart has faced criticism for years over low wages, working conditions, a reliance on keeping workers on part-time schedules, and wage theft."
According to the U.S. General Accounting Office, Walmart has the highest number of employees claiming Medicaid and Food Stamp benefits. Meanwhile, the company reported a profit of $20.4 billion in 2022, prompting CEO Doug McMillon to say, "We're excited about our momentum."
Predatory Pricing
Sometimes businesses set their prices below cost. This sounds daft, but it's a short-term tactic aimed at squeezing a competitor out of the market. For a little while, consumers benefit and snatch up what appear to be bargains. If the strategy works and the predator is the only supplier left standing, then prices zoom higher than they were before.
Predatory pricing is against the law, but that doesn't mean companies don't do it from time to time.
One company found guilty of predatory pricing is Walmart (yes, them again). "Chancery Court Judge David Reynolds ordered Wal-Mart to stop selling drugs and health and beauty products below cost at its store in Conway, Ark., and to pay nearly $300,000 in damages to three drugstores in that community" (Los Angeles Times).
The company also got dinged for the same issue in Minnesota and Germany. Amazon, Uber, and others have joined Walmart in being found guilty of predatory pricing.
Laker Airways was a budget carrier based in Britain. It was forced into bankruptcy in 1982. One of the reasons for the failure was that other, bigger airlines undercut the fares on the routes it flew. An out-of-court settlement saw Laker receiving almost $100 million in compensation, mostly from British Airways, but the airline never flew again.
Laker's grounded fleet after bankruptcy.
Supply and Demand
The basic rule of economics, we are told, is supply and demand. If a product or service is scarce and popular, its price goes up. If it's abundant and few people want it, it becomes cheap.
The cost of a nosebleed seat, 52 rows back from the playing field, at Super Bowl LVIII (that's 58 for those who find using Roman numerals pretentious) was $8,200 on Ticketmaster. The marketplace set that price. More people wanted tickets than the 65,000-seat arena could provide. The price had nothing to do with the cost of mounting the spectacle. It was determined by supply and demand.
There were, apparently, enough people out there willing to part with a ton of money to watch three hours of large men crashing into each other.
The likelihood of Taylor Swift appearing in the stadium seemed to add to the value. Her current boyfriend plays for one of the teams; he catches the football and runs. She did not perform but viewed the game from a suite priced at between $300,000 and $2.5 million, depending on location.
Is it unfair to say that this is an example of supply and demand meeting idiocy?
The venue for the 2024 Super Bowl cost $2.1 billion to build.
Bonus Factoids
- During peak demand, hotels massively increase their prices. Ahead of the funeral for Queen Elizabeth II, the lowest-cost room at London's Park Plaza County Hall hotel went from £269 ($342) a night to £1,299 ($1,656). Most other hotels in the British capital quoted similar price jumps.
- In 2015, Martin Shkreli, the CEO of Turing Pharmaceuticals, increased the price of a life-saving drug that was used to treat malaria and AIDs by 3,000 percent. The U.S. Federal Trade Commission brought a suit against him for securities fraud, and he was sentenced to seven years in prison. He was released in May 2022.
Sources
- “How Much Are Super Bowl 58 Tickets? Here Are the Cheapest and Most Expensive Seats for Las Vegas.” John Fields, profootballnetwork.com, January 28, 2024.
- “Who I’m Hurting by Shopping at Walmart.” Alana Semuels, Time, August 23, 2023.
- “ ‘You Can’t Pay Bills on $12 an Hour’: Walmart Employees Left out of Raises.” Michael Sainato, The Guardian, October 28, 2021.
- “Walmart and McDonald’s Are Among Top Employers of Medicaid and Food Stamp Beneficiaries, Report Says.” Hanna Miao, CNBC, November 19, 2020.
- “Walmart Registers 6.7% Increase in Full-Year Revenue for FY23.” retail-insight-network.com, February 22, 2023.
- “The Story of Laker Airways' Low-Cost Transatlantic 'Skytrain' Flights.” Mark Finlay, simplyflying.com, August 22, 2022.
- “Wal-Mart Guilty of Predatory Price Cutting.” George White, Los Angeles Times, October 13, 1993.
- “Canada Bread Agrees to $50M Fine for Role in Bread Price-Fixing Scandal.” Pete Evans, CBC, June 22, 2023.
- “Price Fixing, Types, Examples, and Why it Is Illegal.” Kimberly Amadeo, thebalancemoney.com, March 4, 2021.
- “Why You Should Steer Clear of Extended Warranties.” Beth Braverman, consumerreports.org, December 22, 2018.
- “The 20 Biggest Rip-Offs in America.” msn.com, January 2024.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2024 Rupert Taylor
