ECON 310 Intermediate Microeconomics
Costco; Your Local Friend
Cal State Fullerton
Superstores such as Wal-Mart, Target, and Home Depot have always been frowned upon by local businesses because of the competition it brings. Lower prices forces nearby stores to lower their prices until they shut down because of the negative profits from lowering their prices or because they don't acquire enough revenue to stay in the market. However ironically this feeling isn't shared towards the opening of Costco, another wholesale superstore. Costco's lower prices surprisingly causes local businesses to raise their prices. Even to the point where investors find area's ...view middle of the document...
(times) This is because of Block Pricing, which puts a consumer at a fork in the road; whether to buy the unit or not. The majority of Costco's product are either considered packaged products or bulk products. For example, at a typically grocery store you could buy a single jar of peanut butter. At Costco you only have the option of buying a pack of two jars of peanut butter. However the pack at Costco would be relatively cheaper then purchasing two separate jars of peanut butter. Another example would be the sale of Alcohol. Local stores would sell a range of six packs up to a thirty-six pack of beer and a range from 50ml up to 1.75L of liquor. At Costco you can only purchase a 24 or 36 pack (depending on the type of beer) and a 1.75L of liquor, at a lower price of course. This brings consumers to pay more to get more at a lower cost. This is how Costco's Block Pricing keeps local stores in business, even as far as to raise their prices. Study shows that in 2011 in the short run, local stores raised their prices by 1.4% and 2.7% in the long run. So how does bulk sale at a cheaper price provide this benefit to local stores. (Freakonomics)
Costco's entrance into s local area's market changes the reason behind consumers choosing between a superstore and a local grocery store. Prices are no longer the main competitive advantage for attracting consumers. Instead is replaced by "convenience and experience". (ann arbor).
A comparison between Wal-Mart and Costco provided by a article by (Wayne F. Casicio) illustrates the experience provided. By experience we mean the quality of customer service. Statistics provided determine that 70% of the total costs of operations are towards labor.(MVOpat) Meaning the employees at Costco are paid well, which provides an incentive to work more efficiently. Costco also provides a unique job security which involves employment status', where an employee with two or more years of service can't be terminated without approval of a senior officer. (mvo) Which in return provides more confidence and motivation in the employee to remain working at an efficient pace. Which all in all provides a better atmosphere of customer service towards consumers. This convinces consumers to prefer to shop at Costco, knowing that they will come out satisfied at the end of the day. (USA TODAY)
Another key difference between Wal-Mart and Costco is the fact that Costco requires memberships from consumers. A contract which consumers pay in order to purchase any product at Costco. Membership prices range from $55-110 annually which in return for the discount prices is well worth. Costco memberships also provide reward programs for the more premium package such as 3% cash back for gasoline purchases. (ann arbor) This provides an incentive for consumers to do their bulk spending ,like groceries, at Costco; knowing that a small fraction will be returned in the short run which eventually adds up in the long run. This not only applies for...