Showrooming Versus Perfect Economic Information

Target hopes to kill  showrooming in their stores by matching Amazon’s price year round. Maybe this will happen, but they may have made the problem worse. Today, I read the term “showrooming” for the first time. I heard the term, “perfect information” for the first time as an undergraduate economics student at the University of Georgia. Ashley Lutz’ article from  Business Insider got me thinking about incentives and unintended consequences.

Example of Showrooming image
Showrooming is the practice of examining merchandise in a traditional brick and mortar retail store without purchasing it, but then shopping online to find a lower price for the same item. Online stores often offer lower prices than brick and mortar stores because they do not have the same overhead cost. Showrooming can be costly to retailers, not only in the loss of the sale, but also due to damage caused to the store’s floor samples of a product…

Showrooming is the practice of going to Target (or some other physical store); finding an item you intend to purchase; and then checking the price of the item as listed in the store, as well as the price of the same item in other locations. (This includes on-line vendors like Amazon, etc.) As a supplier, brick and mortar stores hate this, since they have sunk costs related to building the store to begin with. In their mind, it is not fair that a consumer come into their store, gain value from them by seeing the item, asking the sales staff for help, and then rather than buying from the store, ordering the item on line.

A state of perfect information is assumed in some economic models with the understanding that both the buyer and the seller are rational and have perfect information. (That is, all the pertinent information that is available.) With perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times.

Before  smart phones there was “information asymmetry”. Consumers had to extend more effort to discover the price and availability of an item. Today’s shoppers have more and better information.  With this information, buyers can weight the offering of various sellers. I may save $20 on an item, but I may also have to wait 7-14 business days for delivery. If I chose express shipping, I can have it tomorrow; but if the extra shipping charge is $12 then I am down to an $8 savings. And so the consumer calculation goes.

Here’s the rub… if it is my  responsibility (as the consumer) to inform the seller of a lower price, then I have a strong motivation to ‘showroom’ everything in my Target shopping cart BEFORE I leave the store. So the improvement designed to kill the practice may make it worse.

Bob H. 1-8-2013

Target Unveils Key Measure To Kill ‘Showrooming’

Ashley Lutz | Jan. 8, 2013, 10:47 AM

Read more:

Target just effectively ended the practice of showrooming in its stores by saying it would match Amazon’s prices year-round.

The discount chain said it would match prices of some online competitors all year, instead of just over the holidays. In addition to Amazon, Target will match prices from itself, Best Buy, Walmart and Toys R Us, Reuters reported.

By matching Amazon’s prices, Target is ensuring that customers won’t check out a product in a retail store and then order it for cheaper from Amazon.

The announcement comes after Target reported that sales in December were flat from a year earlier.

“Target said that throughout the year it will match the price when a customer buys an eligible item at one of its stores and finds the same item at a lower price in the following week’s Target circular or in a local competitor’s printed ad,” according to Reuters. “It will also match the price if the customer finds the same item at a lower price within a week on Target’s website or the websites of Amazon, Walmart, Best Buy and Toys R Us.”

Best Buy, Walmart and Toys R Us have also been impacted by showrooming in the past.

While the move is bold, it may not have a huge impact on Target’s earnings. In November, CEO Gregg Steinhafel downplayed the significance of the company’s holiday price-matching policy.

“We don’t see a lot of price match activity in our stores,” he said on a conference call with analysts. “We’ve been price matching for a long time. Our value proposition is so good day in and day out, and our circular price offering is so good that we don’t expect this to be meaningful.”

Still, the announcement sends a strong message that Target sees Amazon as a major competitor.

Reposted from Business Insider:


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