The one about low prices
On economies, markets, and strategies
Friends,
I hope that all is well with you and yours, and that this e-mail finds you on a boat with shoddy connection, in the tropics, three months after I sent it.
Today, we debunk conventional economic wisdom by demonstrating that low consumer prices are not necessarily a sign of a healthy market. The first half is free for all; the second half, which includes the strategic implications, is a premium subscriber exclusive.
Along the way, we discuss quality to price ratios, planned obsolescence, negative externalities, complex systems, Walmart, Amazon, and MediaMarkt.
Now accepting keynotes for 25Q2-25Q4
Every year for the last decade or so, I have created three main presentation decks. For 2025, however, I have (for the first time) added a fourth due to popular demand. They are:
What to Do When You Don’t Know What to Do: How to turn change into a competitive advantage. (Based on the new book by the same name.)
Leadership in a Time of Change: How to steer an organization through a sea of uncertainty.
Resilient Retail: How to build a profitable retail business in the modern marketplace. (Based on the 2025 follow-up to the highly praised 2022 white paper The Gravity of e-Commerce.)
Artificial Intelligence Beyond the Fantasy: How to establish the pragmatics of a new technology.
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A couple of updates before we go-go
The past few days have been rather lovely in my neck of the woods; the temperature has dropped, everything is covered in fresh white snow, and the three-year-old is having a blast on her new pair of skis. As for what is happening in the rest of the world, well, I am too sick and tired of it to even comment.
Lots of travel booked for next year, which is both a blessing and an occupational curse. On one hand, I love meeting new people, hearing new perspectives, and gaining new insights. On the other, the best part of every journey is coming back home to the family.
Kids, man. They get you right in the feels.
On a note completely unrelated to the kindergarten being closed (I probably need to emphasize that as my wife might read this), I need to find myself another couple of really good gins, at least one of which ought to be a London dry. More than happy to listen to suggestions. My all-time favorite, La Republica Andina, is no longer available. The Botanist is my go-to, but I need some exciting new alternatives.
Moving on to the markets.
The market vitals
Pretty much nothing of interest has happened; everyone is on holiday. So, uhm, yes.
Let us move on to today’s topic instead.
A case against low prices
On a mismatch between theory and reality
About a week ago, friend of the newsletter (and yours truly) Doug Garnett shared a story from The Atlantic called The Walmart Effect. As one might surmise from the title, the piece covered the economic implications of the retail behemoth’s expansion.
Along the way, the author echoed an argument that I had made on Doug’s podcast almost a year ago. Given how counterintuitive many - or so the subsequent correspondence told me, anyway - found it, it was interesting to see how others had arrived at similar conclusions.
However, the second half of my reasoning remains unconsidered in the broader discourse. This can only mean one of two things:
I am completely, utterly, and desperately wrong.
The economists, analysts and journalists who make their views public have not identified the same patterns in the market, either because they lack the requisite strategic expertise or because they have yet bothered to look.
And so, today, I am going to expand upon my reasoning and let you decide which of the above is true. The broader economics argument will be available to all; the second part that deals with market specifics and strategy will be a premium subscriber exclusive.
First, though, a bit of background.
The idea that low consumer prices would equal economic (and market) health has been central to Western policy making for a fair few decades. There are a number of reasons why, but two in particular stand out.
The first is that cheap goods would alleviate pressure on low-and-medium income households as the former, rather straightforwardly, save the latter money. The surplus can be spent elsewhere or, better still, be invested into avenues that are leveraged towards the long-term (e.g., education or, on a more direct level, safer-but-slower financial instruments such as index funds). From this follows that low prices at minimum would elevate living standards. At best, they would enable groups to shift their socio-economic status upwards.
The second reason is that low prices would be a sign of a competitive market functioning as it should. Here, the assumption is that as technology advances and becomes more efficient, better goods are possible to produce at lower costs, which would translate to ever cheaper but ever improving products in the marketplace.
My claim was and remains that, as too often is the case with conventional economic wisdom, neither holds up to scrutiny.
Starting with the claim that low prices would save low-and-medium income households money, it is only true if the quality (which we may here translate to average lifespan of good) to price ratio of a given good is above one. That is to say, the customer must be able to purchase something that, in relative terms, has a higher quality than cost. If that indeed is the case, they get more than what they pay for, and gain by choosing the cheaper option.
If the quality to price ratio is precisely one, consumers would get exactly what they pay for; a twice as expensive good would last twice as long. While this appears simple enough, the choice equation actually becomes a lot more complicated. On one hand, buying a cheaper good would enable the investment of the surplus, and so long as the return was higher than inflation plus costs associated with a second purchase (other than the good itself), it would objectively be the “correct” choice. On the other, it is an economist’s argument. Normal people in the real world do not make such calculations.
Should the quality to price ratio be below one, low prices would still mean overpaying. If a more expensive good lasts for longer than the equivalent price difference (e.g., the average lifespan of a twice as expensive shoe is more than twice as long), choosing the cheaper option becomes the more costly strategy over time. Unfortunately, it applies rather frequently, and sometimes by deliberate design. The technical term for the latter is planned obsolescence - the product is designed to ensure an artificially limited lifespan through obsoletion (whether by losing functionality or becoming unfashionable) - and while economists hold that it needs oligopolies or monopolies to work, that is clearly not the case. Entire industries, such as laptop computers, mobile phones, cars, and fashion, depend on it.
But the issue is larger than the individual consumer. For instance, one also has to factor in negative externalities; indirect effects of consumption and production that the price of the product does not take into account. Their existence is easy to anticipate once we establish, as we have in numerous newsletters, that markets are complex adaptive systems. Indeed, one of the key traits of such systems is that the whole is different to the sum of the parts. We might therefore expect to find differences between private returns or costs and the returns or costs to society as a whole.
And so, as the Walmart case illustrates, we do. The arrival of the company predictably leads to adaptation; consumers change their shopping habits, workers switch jobs, competitors shift their strategies, and suppliers alter their output:
When Walmart comes to town, it uses its low prices to undercut competitors and become the dominant player in a given area, forcing local mom-and-pop grocers and regional chains to slash their costs or go out of business altogether. As a result, the local farmers, bakers, and manufacturers that once sold their goods to those now-vanished retailers are gradually replaced by Walmart’s array of national and international suppliers. (By some estimates, the company has historically sourced 60 to 80 percent of its goods from China alone.) As a result … five years after Walmart enters a given county, total employment falls by about 3 percent, with most of the decline concentrated in “goods-producing establishments.”
A story different to that portrayed in conventional economic wisdom emerges: in areas where Walmart opened, there was a larger decline in earnings than the low prices made up for in cost savings, which obviously meant that the overall net impact was negative. Recent research has found that the losses were not limited to workers in retail either; they affected almost all related sectors.
Walmart’s size also practically ensures that it ends up in a monopsony position; the firm is so large that workers have few other options. Wages can be kept down. Other employers are forced to follow suit, and soon there is less money for buyers to save - not because of price increases, but salary decreases.
And then, we get to the implications for markets in general, and strategy in particular.