Carpets for sale

by on October 14, 2003 at 10:52 pm in Economics | Permalink

Have you ever wondered why Persian carpets always seem to be for sale? Why the stores are always having “liquidations”? Why the stores are always “going out of business”?

I presented this conundrum to my Industrial Organization class, they came up with two possible explanations.

First, most consumers have little or no idea what the pieces are worth. So you can tell them you are having a sale when you really are not. A few people might be fooled, and you don’t lose anything with the more knowledgeable customers, or with the more skeptical customers. One student called a relative who was a carpet dealer, he appeared to confirm this hypothesis. Note, by the way, that some localities limit how often stores can claim to have sales.

Second, most customers demand only a small number of such carpets. Repeat business may not be so common. Plus the stores buy large quantities of carpets at a time, receiving discounts in the process. The stores end up holding almost all of their capital in the form of inventory, and very little in the form of reputation. The stores then seek to play the Ronald Coase “durable goods monopoly” game, whereby you start with high prices, hope to sell some, and then keep lowering the price repeatedly, until the stock is gone (then you can buy more and start the process over again). Almost all of the time prices will be falling, which is precisely what we observe.

The highest quality textile dealers, as you might find on Madison Avenue, do not pursue this strategy, and they do not have perpetual sales. They sell to better informed buyers, and they have a greater need to maintain their reputational capital. They are certifying higher valued pieces, and pieces which are bought as investments, not just mere decorations. They will keep price steadier, and build a reputation for reliability, rather than always preparing for the next liquidation.

As always, your thoughts on this matter are welcome.

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