Market Clearing Prices vs. “Low Prices Always”

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    Up until about a year ago I routinely bought .22 long rifle ammo at Walmart for around $20 per 550-round box. Since the Sandy Hook shootings and the subsequent firearm and ammo buying panic there is never any of this product on the shelf. The fellow at the gun counter tells me that Walmart does still sell it, but customers line up early in the morning when the trucks are being unloaded and snatch all of it up within minutes. Those of us for whom the opportunity cost of showing up at 6:30 a.m. is too great always find the shelves empty later in the day. (I still have a couple of boxes on hand, so I suppose for me the marginal utility of the good is not sufficient incentive either.)
    I asked the guy what price Walmart was charging now and was surprised when he said it was still about $20. Ah, there’s the problem, I thought. If they raised the price enough, surely there would be some left at the end of the week. If I were trying to keep customers like me happy (and maximize profit), I reasoned, I would raise the price by, say, $5 the first week. If the product still vanished quickly, I would raise it by another $5 the second week, and so on until I had a box or two left on the shelf when the next shipment arrived.
    Would I be correct in calling that price the market clearing price for the good at that moment? So why does Walmart intentionally keep its price lower than that? I’m sure the company’s management knows their business much better than I do. My guess is it’s because they don’t want to violate their “Low Prices Always” motto. Customers might become annoyed at what they perceived as an opportunistic price increase in the wake of the post-Newtown demand spike, and the Walmart reputation would suffer. Am I looking at this correctly?


    I agree with you. Given that we don’t know all the details of the case, we may be wrong. But it seems likely that Wal-Mart anticipates that keeping its prices low and steady is preferred by customers over time than adjusting prices upward opportunistically. Additionally, it may be that Wal-Mart has long term contracts with it’s suppliers or prior agreements with them not to ask higher prices opportunistically during the term of the contract. It is the case that other retailers have raised their prices and maintain ammunition on their shelves. I’ve also read that at least one manufacturer is building a new, large production facility. So, the market seems to be coming around to the view that the increase demand is not just temporary.

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