Rolling back to recession

A little macroeconomic lesson from the chief thinkers at Walmart.

An article from Time magazine online edition dated Oct 5 (click here for article) indicates that Walmart will reduce its Rollback program in an attempt to increase sales revenue. During the recession, Walmart had reduced prices in an attempt to increase sales. Why didn’t the discounts help, and why the change in policy?

During a recession, disposable income falls and consumption in general falls. Demand for normal goods decreases and sales fall. That is something Walmart can’t fix, but they may not have known it. There is an information problem when using macroeconomic data to make microeconomic decisions. While Walmart surely knew that its same store sales were down, they had no way of knowing, in real time, whether the decline in sales was due to a decline in GDP or whether customers were shopping at their competitors. The government statistical agencies typically take months to produce accurate macro data, and it wasn’t likely that Target and Fred Meyer were sharing their sales figures with Walmart.

Since Walmart can’t fight the recession all on their own, they did what they could, they dropped prices trying to get customers back in the door. The customers, however, did know that the recession was the reason they were not shopping. Because of that, consumers stalked up on the 40 oz bottle of ketchup and the 50 oz bottle of Tide. The demand for these products is inelastic meaning that consumers don’t use more when prices fall, and total expenditure falls as price falls. When consumers expect prices to rise, as they will after a temporary sale, they will buy at the low price. This just shifts the pattern of spending, not the total spending.

Abandoning this plan, Walmart is now raising prices. Paradoxically, that will increase sales revenue, unless of course, Target and Fred Meyer drop their prices.