How do many businesses selling the same things at the same prices stay in business without differentiating themselves or asking a lower price?

January 12, 2009 7:14 AM

EconomicsFilter: how do many businesses selling the same things at the same prices stay in business without differentiating themselves or asking a lower price?

Living in Seoul, South Korea - and many of the same shops sell the same things, at the same price, in the same general location. What gives?

If you've never been to Seoul, imagine a floor of 50 shops. They're all selling the same thing (e.g. cameras), using the same displays, use the same sales pitches, and sell things at the same prices. These prices are essentially commodity-type prices since they probably buy from the same wholesalers. At any given time, however, few businesses HAVE any business. So how do these people stay in business?

When given the choice, I would imagine most people would simply walk around until they find what they believe to be the lowest price (given their disadvantage of information), choose the closest vendor (thus giving an advantage to the dealer closest to the escalator), or seek out a familiar person / business they've worked with in the process (meaning bad / expensive vendors would eventually close).

(This, by the way, may be posted about in a future blog post - if your words are used I'll credit your username or leave you anonymous as a econ guru. It's not a homework assignment or anything so academic, yet it seems to require an economic explanation.)

posted by chrisinseoul to shopping (10 comments total)

So all the stores are RIGHT next to each other, or scattered every few blocks?
posted by Pants! at 7:24 AM on January 12

Well if the dealers close to the escalators get more business, you might find that reflected in the rents they pay. So they could be charging the same price as everyone else, but make the same total profit because they have to pay extra for location.
posted by thrako at 7:29 AM on January 12

Customer loyalty and personal relationships. A good salesman or friend can get you to buy exactly what his competitor is selling even if it's more expensive. Lots of businesses purchase their inventories and supplies this way. Office-supply-vendor A sells equivalent products for equivalent prices as vendor B, but it's a pain in the ass to switch vendors, so even if B cuts his prices a bit, he's going to have to give a really good sales pitch to get any new business.
posted by valkyryn at 7:32 AM on January 12

Also, it may be that while there is variation in prices across stores, no store has consistently higher prices than any other. The lowest-price store could change from week to week, as different stores manage to negotiate better prices or lending terms.
In addition, there could be substantial turnover in the ownership: stores going out of business, only to be replaced by shops selling the same things. If you are going to start a business, it might actually make sense to locate in the "camera district", because although you are near competing firms, you can be sure that interested consumers will be there to.
posted by thrako at 7:38 AM on January 12

Why do you assume they stay in business? Could it be that they frequently go in and out of business, and that the situation only looks stable because the individual businesses look so similar?

I would imagine most people would simply walk around until they find what they believe to be the lowest price..., choose the closest vendor..., or seek out a familiar person / business they've worked with in the process...

The fact that various vendors have different advantages that appeal to different sets of customers makes a situation like this more likely, not less.
posted by jon1270 at 7:41 AM on January 12

Just out of curiosity, is foot travel exceptionally common in Seoul, or is traffic terrible? It it easiest to simply buy from the vendor that's closest?
posted by jon1270 at 7:43 AM on January 12

@Jon1270 - Foot traffic is generally decent - in most cases there's enough foot traffic walking by. It just seems like the whole supply and demand equilibrium is shifted - lots of supply but not much demand. As a result, the equilibrium price is essentially set at a price that makes things look like a commodities market.

@Pants - I'm referring to places where the same type of shop are open amidst many other shops just like it. For example, Yongsan Electronics Complex, where at least 100 different booths / shops exist on one floor of one BUILDING to build a computer to your specs. They use essentially the same price list, updated every 12-24 hours. Another example is the Jagalchi Fish Market in Busan. Perhaps 50 booths can cook the fish you bought on the first floor or prepare the same type of dishes for you at the same prices.

@valkyryn - I would be prepared to accept 'customer relations and personal relationships' except we're talking about things you don't buy that often (computers) or don't do that often (visit touristy destinations).

In all cases, the amount of information is staggering, overwhelming, and definitely too much for even the person living there to keep track of. The consumer, trusting in the fact that they'll get a good price thanks to the high competition, feels like they win and will buy from whomever they like. It's just an interesting phenomenon. In America, I never saw more than a few stores trying to sell the same thing at basically the same price without something done to differentiate the product, the store, the service...
posted by chrisinseoul at 7:57 AM on January 12

You said these are touristy items in a touristy area? I'm speculating here but...
1. maybe there's enough business spread out to keep most if not all the shops in business. If we assume that customers pick stores randomly, given enough customers and sales to support x stores, then x stores could, in theory, stay in business.

2. again assuming that there're a lot of tourists, maybe the stores have deals with various tour groups. A lot of tour groups supplement their business by making deals with certain stores in return for their "recommendation" to shop there.

As for *why* the stores don't bother to differentiate...I've found "marketing" to be a pretty foreign concept in a lot of countries. And if there are a "staggering" number of items, the store owners might not consider it worth the effort to differentiate. Also, there might be tacit agreements to keep the prices the same. After all, with so much competition, having price wars is simply a race to the bottom with the result that everyone loses. Imagine if everyone starts to try to undercut each other. Eventually you'll get to a point where everyone has to go out of business or hit some sort of equilibrium point where if you lower prices, you won't make money any more.
posted by edjusted at 10:31 AM on January 12

IANAE, but in a touristy area like the one you describe, the demand can be such that all the shops can sell the same stuff at the same price. South Korea's economy is more stable than many other Asian countries', but based on experience I'd say that the guaranteed customer traffic, coupled with the low cost of living that most shopkeepers maintain, would account for the phenomenon you describe.
posted by Rykey at 1:45 PM on January 12

There are many places like this around the world- think about jewelry stores in the Caribbean, or souvenir shops near Times Square. Often they are accompanied by employees who stand in the path of tourists and try to lure them in. A tourist doesn't likely have a pre-existing relationship with any one store, so they're most likely to go where they think they will A. get the best price, or B. get better/faster service. And given the number of stores, a tourist may go into only one or two before making a buying decision.

As thrako mentioned, it's likely that many people who go to that area are looking for those very goods, so many shops sell similar items. In competition for business, they are probably selling the cameras and other key goods at or below cost. Instead of profiting on the key item, they may try to talk a customer into buying corresponding accessories, like camera bags, lenses, film/memory cards, etc. Even with those sales, it's likely that the overall profit margin is very low and most stores are just scraping by.

A couple of other thoughts:
- It's fairly likely that some of the stores are owned by the same person or company, so the competition may not be as fierce as you think.
- In order to stay in business, a store only needs to profit enough from a sale to pay the rent, utilities and meager wages for its employees. A store doesn't have to be profitable to stay in business.
- If other businesses such as clothing retailers or restaurants would be more competitive/profitable in that store location, they could offer the landlord a higher rent. Keep in mind that the suppply/demand equation applies just as much to retail space as the goods being sold within.
- Economically speaking, the market only provides enough business for x number of stores. When the number of stores exceed x, some go out of business. If the number of stores is less than x, more players will enter the market. Therefore, if the number of stores has stayed consistent over time, there is sufficient business to justify that number of stores in that area.
posted by JuiceBoxHero at 5:19 PM on January 12