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Wal Mart's Price Strategy Essay

1204 words - 5 pages

In 2003, the Wall Street Journal reports that a survey conducted by Banc of America Securities found that Wal-Mart's prices of 15 popular toys were 12 percent lower than those of Toys "R" Us, the largest stand-alone toy retailer, and 8 percent lower than prices at discount retailer Target, the nation's No. 2 general retailer after Wal-Mart.The Journal says that Toys "R" Us executives have acknowledged that the Wal-Mart price cutting has caught them somewhat by surprise and was among factors hurting its recently reported third-quarter results.Why Wal-Mart, the world's largest retailer, cuts toy's prices so deep in 2003?It is for the market share. Before 2003, Wal-Mart was No.2 toy retailer. ...view middle of the document...

After the 2003 toy price war, in 2004 holiday season, Wal-Mart was expected to cut competitors some slack by not maintaining such cutting throat pricing as 2003. Why would Wal-Mart not continue the price war and beat the competitors to the end. "Wal-Mart felt they left money on the table by cutting prices deeper than they needed to in order to get the sale," says Sean McGowan, analyst at Harris Nesbitt.After luring millions of consumers from traditional toy stores, Wal-Mart does not need to cut price deeply to hold the No.1 toy retailer position. It's not that Wal-Mart's prices are much lower than those at Toys "R" Us; one analyst pegged the advantage at 1.2%. But Wal-Mart's combination of price and convenience is powerful indeed. Toys "R" Us is a big, brightly colored store where you could spend hours and not see every toy. Consumers go to Wal-Mart to buy something else, but can't resist trolling the toy aisle for a bargain.For instance, Heather Dambek, a Chicago mother of 2-year-old twins, doesn't come to Wal-Mart intending to buy toys, but she winds up with them in her cart. "I'm in here once a week for things like toilet paper, and every time I browse for toys," she says, "I see the prices and get suckered in."Wal-Mart uses some toys as a loss leader, leading to the potential demise of toy-only competitors like Toys "Я" Us and FAO Schwarz. Obviously the purpose is Predatory pricing.Predatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market, or create a barrier to entry into the market for potential new competitors. The other firms must lower their prices in order to compete with the predatory pricer, which causes them to lose money, eventually driving them from the market. The predatory pricer then has fewer competitors or even a monopoly, allowing it to raise prices above what the market would otherwise bear.A highly efficient distribution system and retailing expertise give Wal-Mart a cost advantage that enables it to price its products below the competition and still make a profit.Unable to stop...

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