ECONOMICS IN ACTION How can knowledge of the PED of different consumer groups help firms to plan their pricing strategies? Why do you think advertising may reduce the price sensitivity of consumers? FLAT PACKED AND PRICED IKEA, the Swedish home products company that designs and sells ready-to-assemble furniture, appliances and home accessories, is the world’s largest furniture retailer with more than 300 stores in over 35 countries. It opened its first store in China in 1998 and now has a number of outlets across the country including in Shenyang, IKEA’s second largest store in the world with 47,000m2 of floorspace. Whereas in most areas of the world IKEA products are considered ‘good value’ by most consumers, in China its products were thought to be aimed at consumers with high incomes. However, this also meant that many Chinese consumers were very sensitive to price and a small reduction could persuade many more to buy IKEA products because they also wanted to be associated with a high income ‘lifestyle’ created by the IKEA brand. After cutting all its prices by 10% IKEA's China sales rose by 35% that year and 50% the following year. It all Ads up! -moc gnitsixe no erusserp gnitsixe -dael tekram eht fo eno ,letriA itrahB llacMarket rieht poresearch rd ot itracarried hB ekilout seinby apthe Neilson esir a deCompany troper ,smand ocelArbitron et naidnin I nthe i sre tnacfiinUSA gis ausing evahallpanel iw sihof t d11,000 na segrapeople hc pacross aehc sa5,000 stfiorphouseholds ten ni esir found %31 tsthat uj fo .stfioritpisdpossible na serahstoteidentify kram nconsumer o tcapmi groups a dnwhose a srotitsensitivity epmoc ybtodeprice reffodepends setar llac on their exposure to advertising. sremotsuc ffirat-wol fo rebmun gnisir dias lattiM linuS feihc letriA itrahB .htwto orgadvertising fo etar ehtappeared nwod delto lup found exposure ehTheir t detaanalysis itini ton d ah ynthat apmincreased oc eht demand -ces-rreduce ep fo hcthe nuasensitivity l eht htiwof stuconsumers’ c ecirp ,letriA eto kilprice seinachanges: pmoc mothere celet twas soM advertising gnidnaonegative pser ylerrelationship em si dna gnbetween illib dnoprice elasticity evah leofcrdemand iA dna Land NSB ,enofadoV exposure. Audiences exposures sensitivity .sdeen rwith emothe tsuchighest ot gnigrahc ,gshowed nillib dthe nocleast es-rep dehcnual to price changes. -ni sdnoces fo sisab eht no sremotsuc .egrahc etunim rep reilrae eht fo daets roneleT ekil stnartne wen ,noitidda nI Stimulus Questions: 1. Why was the demand for IKEA products by Chinese consumers reportedly more price sensitive than consumers in many other countries? 2. Why is information on price elasticities helpful to IKEA? 3. What evidence is there from the article to support the view that Chinese consumers of IKEA products are more price sensitive? 4. How can advertising make consumers less price sensitive? 5. How could knowledge of this research help IKEA?
