JC Penney’s Fair and Square Pricing

June 1, 2012

in Business Thinking

“If consumers are Bayesian, firms will not shroud information in equilibrium.”

Sad and fascinating.  I’ll take failure any day.

“Bayesian consumers infer that hidden add-on prices (e.g. the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors’ customers. However, if add-ons have close substitutes, a “curse of debiasing” arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to non-exploitative firms. […] informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.”

Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets

“Could we have a moment of silence please for what might be the last heartbeat of honest price tags?

“You might have seen recently that iconic retailer JC Penney is slumping badly. You almost certainly have seen the reason why: A massive, creative and aggressive new advertising and pricing campaign that promises simplified prices.

“No more coupons or confusing multiple markdowns. No more 600 sales a year. No more deceptive circulars full of sneaky fine print. Heck, the store even did away with the 99 cents on the end of most price tags.  Just honest, clear prices.

“The campaign, which launched on Feb. 1, appears to be a disaster. Revenue dropped 20 percent for the first quarter compared to last year. Customer traffic fell 10 percent. Last year, the company made $64 million in the first quarter; this year, it lost $163 million.”

‘Fair and square’ pricing? That’ll never work, JC Penney. We like being shafted.

 

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