Talking about perfectly competitive markets in class made me realize how few markets actually have those characteristics. One of the most obviously ones in my opinion is the market for shoes.
This market is far from perfect mostly because of brand recognition, which violates the homogeneity of goods assumption. Most brands of shoes, such as nike or adidas try to distinguish their products from other brands. These brands use excessive advertising to put in the minds of the public that their shoes are much better than other brands. Athletes are often used to achieve this goal. A pair of Lebrons or Jordans costs considerably more than average shoes, yet this doesn't really mean that the quality of Lebrons or Jordans are much better. Because these athletes have such big names, the demand for their shoes are much higher than the demand for others. In a way, brands such as nike and adidas have some control on their demand curve, again violating perfectly competitive market assumptions; these companies are not necessarily price takers. Also, some shoes have limited amounts of output, such as limited edition Jordans. These shoes cost even more than usual, because the supply is limited. By limiting output, companies charge higher prices, and presumably make more profit.
Personally, I would never buy a pair of shoes for more than a hundred dollars, but not because I know what the companies are doing to make prices high, but just because I don't have that kind of money. If I had a large income, I would have no problem getting a pair of new Lebrons for a hundred and fifty. I guess whatever the companies are doing is working pretty well.
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Obviously this market is not perfectly competitive but I think it still works from an economic standpoint. These shoes act as a luxury good with a major prevalence of the snob effect, and it is the high prices themselves that make people want to buy them. Dave and Barry's used to sell the Starburys for like $15 dollars, and while they were not the quality of Jordans, Jordans are not 10 times better shoes. Shoe prices are a very interesting topic because prices are also very high for good running shoes, but those prices are a direct result of the shoes being higher quality. Nike knows that Jordans and Lebrons serve as an indicator of one's image, and this by itself adds increases the price 15-20% over the price of the company's other good quality basketball shoes.
ReplyDeleteI thought about the excessive advertisings of the shoe brands. Is it effective to possible consumers with the emphasis of images or unworthy because consumers are not strongly affected by the ads? As Kyle mentioned during class, Coke and Pepsi make hundreds of ads but most customers do not choose Coke instead of Pepsi because they are affected by an advertisement. At least, when the kind of soda was just introduced, it is different story. (Advertising is essential and important.) However, most customers get used to the brand names, and now is the time to consider what really makes them choose a specific brand over the others. I believe that peer evaluation is one of the important elements in choosing a brand. This means, customers also consider how others think as they purchase a product. It is especially true if the target of customers is university students like us! We have limited but allowable amount of money to buy shoes (if we really have to buy them), and we will strongly consider the popularity of brand among our friends.
ReplyDeleteI agree with the snob effect aspect. It is curious to me why people still buy shoes that they know are not quality driven. Good old marketing people! I dislike them and admire them. I also agree with the price of quality and it is interesting that I do not see many suppliers entering the market when there seems to be a decent demand for a product. My example is Cole Hann dress shoes, heals, for women. I could not believe how much my girlfriends shoes were, $350.00. She loves/adores/praises them and every one of her friends, who can bear to buy them, loves them as well. The niche is that no one else puts a Nike air type foot bed in their healed shoes. All the other shoes, she now lets collect dust were half the price and claimed to be similar but do not make the leap of quality. I also invest in top quality shoes now and it is worth it if you know what to look for. Do some homework.
ReplyDeleteI agree with what is written that the market is not perfectly competitive, I would even say that the shoe market consists of a couple of monopolized shoes, as in the LeBron and Jordan brands. However, with that said, I will say that I own two pairs of Jordan shoes and other numerous shoes over 100 dollars. This is because I view shoes with a high residual value and do not mind spending alot of money on shoes. Personally, I would rather own a couple of expensive shoes and wear them all the time then own numerous less expensive shoes and let them sit in my room. But, even though these shoes are highly priced, there is still enough of a demand to keep them priced high and offer a low supply of shoes, so I would say that the market is at it equilibrium price. And when it comes to a product, especially a luxury product like a brand name shoe, I would say the market is greatly affected by how much a a custoner views the benefit to cost ratio rather then the characteristics of the market.
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