Thursday, November 26, 2009

Happy Thanksgiving ... Shopping

This New York Times article reports new tactics retailers are using to get shoppers into their stores beyond Black Friday. Retailers have always known that short, steep discounts cannot create sustainable sales cycles. Hence, WalMart's 'Everyday Low Prices', Southwest Airline's consistent policy of low prices, and (now defunct) Saturn's no haggling prices. However, few retailers can sustain such strategies unless they had cost structures that allowed selective responses to rivals without subverting their business models.

The alternative to everyday low prices are price wars, which often result in spiraling declines in pricing power. Good for consumers, bad for everything else. Congress's attempt to impose Cap and Trade, together with the various state-level initiatives to limit carbon emissions will pressure manufacturers that cannot pass on the inevitable cost increases to consumers. Consumers who are now conditioned to a world of paying low prices all the time.

Companies that want to stay in business will have to find ways to be more efficient; for example, by replacing human with technological capital, outsourcing services to lower cost regions, and restructuring their business models to deliver more with less. Net result? Lower levels of employment, lower consumption, lower global economic growth, at least for now.

Don't get me wrong. Limiting pollution is a good thing. However, exogenously imposing limits on choice does not lead to economically sustainable growth. The solution to pollution must be endogenous to the production-consumption dynamic. This requires consumers to think differently about the way they buy, producers to rethink their product design and business goals, and legislators to move away from abstract notions of 'good' to understanding the impact of their laws on human communities. There are early indications that consumers and producers are responding, not to legislation, but enlightened self-interest. There is no indication that legislators are similarly driven. This is because if legislators were honest with themselves, they would arrive at the obvious conclusion that legislating choice is almost never a good idea. What then would they ever do with all that time on their hands?

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