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Minimum markup law ignores value principleBy Deborah Mitchell
Perceived value is the net benefits the consumer understands a product or service to deliver. These benefits may include intangible, nonfinancial aspects (e.g., "if I buy from this retailer I feel good about helping the community") as well as tangible ones. Firms that do a good job communicating that they offer superior value can charge a higher price; firms that do a poor job, or inadvertently send the message that their product is just like everybody else's product (i.e., is a commodity), cannot charge a high price. In this way, markets are driven by buyers choosing the goods that deliver the greatest value (not the lowest price) to them as they see it -- and consumer welfare is maximized. Price plays a sensitive role as the objective gauge of consumers' subjective opinions. The Wisconsin minimum markup law ignores this fundamental principle. It destroys the ability of price to function as a gauge. And it is based on several flawed assumptions, including the idea that people will always purchase from the vendor who offers the lowest price. The notion is that there must be a fixed markup applied to all to protect firms who may not be able to match or beat a lower price offered by a competitor. Recently, the law forced Target and Wal-Mart to make changes to their plan to offer some prescription drugs for $4. But there are plenty of historical (and current) examples where consumers buy from 'the little guy' even when larger competitors aggressively compete on price. This is true even for products and services which, like gasoline or prescription drugs, might seem at first blush to be simple commodities. The key has always been to make what you offer bigger than just the core product or service -- and appeal to the buyer on the basis of value, not just price. For example, one could argue that Southwest Airlines wouldn't even exist today if consumers hadn't been willing to continue flying the airline back in the 1970s when Braniff started a price war. Remember Braniff? They were the 'Goliath' to Southwest's 'David' back in the Texas market in 1973. Ironic how, more than 30 years later, 'David' rules the airline industry, while big tough Braniff is long gone from the scene. Braniff cut fares by 50 percent, knowing that Southwest couldn't match their price. The situation could have been the death knell for Southwest. But Southwest had the last laugh. They appealed to consumers' sense of fairness as well as value by going public about the situation, and were able to not only hold on to market share, but increase it without cutting price. My MBA students are always keen to learn what to do, and what not to do, if faced with a price war. Always we start with the fundamental principle: It's not about price -- it's all about value. If consumers see value in what you do, they'll pay more -- and not only will they not mind doing so, but in the end they'll be better off! A true win-win for the buyer and the seller. Predatory pricing, where a firm prices below cost for a time to drive a competitor from the marketplace, is wrong. But there are other legal mechanisms to prevent or police predatory pricing other than a minimum markup law. We need to remove artificial mechanisms that ignore the laws of consumer behavior and interfere with the natural systems that operate in fair markets. Then, consumers win -- and businesses, both large and small, can win as well if they deliver the value consumers seek. Deborah Mitchell is the executive director of UW-Madison's Enterprise MBA programs. madison.com ©2009 Capital Newspapers. All rights reserved. |
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