Sunday, February 28, 2010

Half Empty: A little shopping trip of huge proportions

Philadelphia Inquirer article "Half Empty: A little shopping trip of huge proportions" (February 28th, 2010) makes an argument that doesn't quite add up for Corrections. The Inquirer argues that Costco has a clever marketing concept because once in the store, customers are unable to resist buying things they do not desire.

The prices are remarkable, or at least they seem remarkable since you have to buy everything in very large multiples. The marketing concept is pure genius, since the Costco folks know that beginners will go down every row looking for deals, inevitably buying something of no use.

If this was the case, Corrections would expect that customers would choose to avoid the store if they had addictive or dynamically inconsistent behavior. Furthermore, that new customers would have heard of the addictive shopping and would avoid the store just as old customers do.

In reality, Corrections expects that Costco could possibly make its money by bundling a good, forcing a consumer to buy a little more than he would have preferred, sacrificing some of his consumer surplus for a higher quality good (equivalent here to a larger pack of goods).

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