Matching Prices during the Holiday Season
https://www.nytimes.com/2022/10/18/business/retail-holiday-shopping.html
Due to inflation, it has become harder and harder for people to shell out the money they used to spend on holiday purchases. Almost a quarter of retail sales happen during the holiday season, so less spending by consumers poses a big problem for retailers. This means that retailers have had to lay off workers and close store locations in order to cut losses. Furthermore, companies have has to resort to discounting their products, which is detrimental to their profit margin. Due to supply chain issues in recent years because of the pandemic, companies could avoid discounting because demand for their short supply was high enough. However, this year, discounting feels like the only way to get buyers with a smaller budget than usual to spend their money.
This situation creates an interesting matching problem; buyers hold less value in items than previously, but sellers still want to sell at or above the prices of previous years. If we were to created a preferred-seller graph of this (simplified) scenario, the prices of each item would be greater than each buyer’s values, making all of their payoffs negative and therefore not worth the purchase. In class, to find market-clearing prices, we started with all of the prices set to zero, and raised the prices until we reached market-learning prices. In this case, we would have work backwards; instead of raising the prices until we match everything, the companies would need to lower their prices until market-clearing is achieved. It is a tough task to find prices that entice customers to buy the items but still give the sellers reasonable profit.
This holiday season, retailers will struggle to meet their usual profits, but discounting their products will be a necessary course of action for them, otherwise profits will fall even further and they will have a surplus in goods that nobody was willing to purchase at their too-high prices.