Jon Vallee
Economics 2010-004
04/23/2015
Nash paper
Income elasticity is a function of economics that states when a consumer’s income drops
they are less likely to buy expensive products and they will substitute cheaper goods or go
without in order to make up the loss of income. Particularly lower income families are more
elastic as they have less money to spend in the first place and the loss of income is felt as two
and a half times more than an income gain. This presents a problem for businesses that
depend on this income in order to fuel their profits. The question becomes: how will I continue
to encourage these customers to come into my business and spend their hard earned money
that they now have less of?
Walmart depends on lower income families shopping in their stores to turn a profit
especially when it comes to groceries. Earlier this year they had a big problem getting them into
the stores since the food stamps program was cut and these families chose to shop in cheaper
stores. These customers have proven to be very elastic from a demand standpoint. This limits
Walmart’s chances of keeping these customers and once these customers are lost it is difficult
to gain them back. All of the following choices have the potential to drive down prices back into
the realm where lower income families will once again be able to afford them and demand more
of them. They had a couple of choices to try and keep these customers; they could have
offered discounts via coupons, try to offer substitute goods that are cheaper, or try and lean on
the vendors to once again offer them a lower price. They instead chose to build more stores
which I think was a bad choice.
These coupons are what are known as price discrimination in economics. The discount
coupons would be focused on being mailed out, during times of economic downturn, to lower
income housing areas to try and convince these elastic customers to shop there instead of at
Dollar Store etc… The coupons would focus on such items that are known to be particularly
elastic and important. The reduction in price on these goods would also make them more likely
to spend money, if they have any left, when they are in the store on other products that net a
higher profit. Walmart could even use the money they were going to use to build more stores to
instead implement a data collection program that would customize the coupons to the
consumer’s needs like other retailers have.
The other option Walmart has to try and keep these lower income families coming into
their store is to offer them substitute goods. They can offer them cheaper brands of the same
products they are used to buying or a different product that has close to the same effect. These
could even be the great value brand that Walmart itself manufactures and offers. Although
offering a cheaper good may not sound like a good idea, if it makes the customer happy they
will be more likely to return. So selling the cheaper product may in the long run make you more
profit as this customer returns. This may not always work as some consumers prefer to use
certain brands that they have been purchasing for years, but others may find they like the new
brand even better.
The last thing Walmart can do is to try and convince their suppliers to lower their prices
and in return pass these savings on to the consumer. The suppliers could even shrink the
package and the amount of the goods in each package to cut their own costs. The consumers
would be less likely to notice the smaller package then they would notice the lower price. This
will work with any cost that Walmart has on its books by reducing the cost of producing,
shipping or selling each item would allow them to lower the price of the good.
Building more stores makes it more difficult for Walmart to make an economic profit.
Each store that is built adds onto their average total costs. They must pay the employees as
well as the utility bills and taxes on the land etc… When you add to costs you have to find a way
to pay for them so they may have to increase prices on their goods. This has the potential to
scare away lower income families that are already struggling and depend on Walmart for its
cheaper goods especially in more difficult times.
Walmart can boost its profits by offering discounts to lower income families in times of
economic hardship. It can do this by giving out coupons, offering substitute goods, and by
trying to convince their vendors to lower their prices. This would encourage these families to
continue shopping at Walmart even when they have less money to spend. More importantly
they need to stop building more stores and in turn driving up their costs. Once they lose these
customers they will be difficult to bring them back and this will hurt their profits.