Walmart and Market Clearing Prices
Among different retailers, Walmart has increased pressure on its suppliers to cut costs in order to regain its dominance as the US’s low-price leader. Sources have revealed that Walmart wanted suppliers to make logistic movements such that they need to work harder and faster in shipping the orders, so they can trim delivery costs, reduce re-orders, and reduce out-of-stock problems. This would help them get around $1 billion in sales. According to one of the suppliers, they had to cut prices on some of the company’s product by almost 20% for some retailers just because they were drilled to lower their prices. Furthermore, Walmart’s competitors have proved that cutting prices is the only way to further dominate the market again. For example, other stores such as Aldi and Kroger are quickly catching up in the game, such that Aldi’s prices have been 20% lower than Walmart’s for some of the grocery items. Even though Walmart has control over 22% of the US grocery market, it can quickly go down when other stores have much lower prices.
Personally, I believe that strictly telling the suppliers to cut prices may not be the best move. This can possibly hurt the relationship between the retailers and the suppliers, thus damaging the profit for both sides. From what we learned in class, I think that both the suppliers and retailers should establish market clearing prices for each good. For example, Walmart can have a meeting with all its suppliers with Walmart’s valuation on categories of goods, and run the market clearing prices for each category with its suppliers. The prices would start at the lowest price possible that the suppliers can take, and going up from there. If Walmart isn’t satisfied with the prices, both sides should talk it out. In the end, the market should be in some sort of Nash equilibrium where both the suppliers and the retailers are less favorable if they change their position.