Economic Thought Question
Why do we hide wholesale prices?
by Marshall Brain

Today's thought question: Why is it that we hide wholesale prices? In a free and open society, why not make them visible, so that everyone knows what the wholesale price of everything is?


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Thanks for visiting today,

I live in Raleigh, North Carolina. If I want to buy a can of soup, I have four major supermarket chains to choose from:

  • Food Lion
  • Kroger
  • Harris-Teeter
  • Lowes
Let me tell you about something that happened to me recently at one of these supermarket chains.

I had walked into a supermarket with my wife and children to do the weekly grocery shopping. This supermarket is the Southeast's "Headquarters for Low Prices." You probably have a supermarket chain in your area that uses this approach. "We buy in huge volume, so you get rock bottom low prices" and so on. One of the things I picked up was three cans of Campbell's Chunky Soup for $1.99 each. I didn't even think about the price because I believe the pitch -- I trusted that the store actually did offer low prices.

Our next stop was the local Target store, which to my surprise also had Chunky Soup in the grocery section of the store. Target's price was only $1.69 -- 30 cents cheaper per can. This was perplexing to me. I thought the profit margin in a grocery store was razor close -- a penny or two per item. How could there possibly be 30 cents of leeway in pricing this product? At Wal-mart it was even less -- $1.49 a can. At BJ's (a warehouse club like Sam's or Costco), they had Chunky Soup in six-packs for $8.99, or $1.50 a can.

I visited all the other major chains. At Harris-Teeter, Lowes and Food Lion, the price was unanimous -- $1.99 per can for Chunky soup. At Kroger the price was $2.39 or $2.59 per can, depending on the flavor. Any of these grocery stores could have bought Chunky soup at BJ's or Wal-mart, marked up the price 20 cents per can to match Target's price, and still beaten all its competitors' prices by 30 cents or more per can.

What does this mean? Food Lion has over a thousand stores. Kroger has 2,500. BJ's has less than 200. Surely Kroger and Food Lion have more "buying power" than BJ's. And the specialty packaging required to create a six pack for BJ's -- the six cans in the six-pack are put in a little full-color cardboard case that wraps around all six cans -- would make BJ's soup cost more rather than less to produce. Given that BJ's is selling its specially packaged soup for $1.50 a can and still making a profit, this may mean that the supermarkets -- with all their advertising about super low prices -- are paying a buck a can for the soup and then marking it up 100%. For all we know, supermarkets are making $1.00 off of every can of soup they sell.

We have no way to know right now, because the wholesale price of soup is completely hidden.

The question we have to ask ourselves as consumers is, "How can there possibly be a $1.00 spread in prices on a commodity item like a can of soup? How can one store be selling the soup for $1.50, while another is selling the same can for $2.50?" Clearly, a can of soup for $2.50 is overpriced if, a mile down the road, the same can of soup is available for $1.50.

Prices

As a consumer, how much do you want to pay for a can of soup at a grocery store? You would like to pay the cost of the can of soup from Campbellís -- let's say it is $1.00. You would reasonably expect to pay the cost of transporting the can of soup to the store, along with the cost of the building and the shelves that hold the can so you can pick it up, plus the cost of the employees who stock the shelves and keep the store running. But these costs are miniscule for one can of soup.

For example, transportation costs are nearly zero. You can buy a gallon of water at a supermarket for 50 cents. A gallon of water weighs 8 pounds. You can buy a 40-pound bag of topsoil at Home Depot for $1.60. That works out to 4 cents a pound, and part of the price is the cost of the actual topsoil, the bag that holds it, the labor to put it in the bag and put it on the shelf, etc. The transportation cost on a can of soup is just a penny or two. The cost of infrastructure (store, shelves, employees, electricity, etc.) is spread over the millions of products sold per year through the store, so it is just a few pennies too. Letís say that the cost of warehousing, transporting, shelving, managing and selling one can of soup is ten cents per can. [ref] You, as a consumer, would like to pay a 10 cent markup and no more.

If you have to pay any more than a ten cent markup for a can of Chunky soup, then that is inefficiency in the system. It is the store charging you more than you need to pay for the can of soup. It is a breakdown in the marketplace -- one big advantage of capitalism is supposed to be its ability, through competition, to drive inefficiencies out of the system and push prices as low as possible.

In this simple example, it is easy to see that the promise of capitalism is broken.

Price Consciousness

Contrary to what should be happening in a capitalistic system, the prices we pay are all over the map. You can see that in the soup prices quoted in the previous section. In my neighborhood I can walk from Target ($1.69 a can) to BJ's ($1.50 a can) to Food Lion ($1.99 a can) -- these three stores are less than a mile apart, yet there is an amazing spread in soup prices. Coke's infamous vending machine that senses temperature and increases the price of soda on hot days shows just how arbitrary prices are, and just how willing corporations are to endorse indiscriminate price gouging.

How can prices vary so much? It's because most people don't have time to analyze prices on the thousands of items they purchase, nor do they have time to drive to six different stores to do the weekly grocery shopping. Corporations know that, so corporations can move prices all over the map with immunity, gouging customers constantly. Since wholesale prices are invisible, it is impossible to detect price gouging at the moment of sale.

When we are able to do price comparisons, we care about price right down to the last penny. Consider this. Imagine that I own a supermarket and I am selling soup for $2.50 a can. I am skimming $1.00 in pure profit off the top of the $1.50 Wal-mart price. For the most part, no one knows this is happening because no one can remember the prices on thousands of items from store to store. Therefore my pricing policies are invisible and no one complains. Now, what if the sales tax goes up a penny? There will be a HUGE outcry about that penny. HUGE. The sales tax is exposed and visible, so you will hear about it in the paper, on the radio, on the evening news. Radio talk show hosts will rail against the redistribution of wealth caused by taxes and the excessive tax load. All of that outcry over a single penny. Yet there is no outcry at all about the $1.00 markup per can because it is invisible.

Fixing Capitalism

When you buy something in the store, you are paying the "retail price" of the product. The store that is selling you the product paid the "wholesale price" for it directly from the manufacturer.

In today's marketplace, do you know what the wholesale price of a can of Chunky soup is? Probably not. That's because in most cases both the manufacturer and the retailer are doing everything in their power to hide their wholesale prices from you.

Why do we, as consumers, allow the wholesale price to be hidden like that? Why do we accept an opaque marketplace? The opaque marketplace fuels price gouging in our society, yet we stand by and accept it. Why shouldn't consumers be able to buy things for their wholesale price straight off the manufacturer's web site? Why is it that only certain retailers have access to wholesale prices? If wholesale prices were visible, people would complain mightily about excessive markups. And when they start complaining, prices go down -- this would be good for all consumers. And since we are all consumers, this would be good for everyone.

Here is a simple suggestion to solve the price gouging problem and give consumers a level playing field in the marketplace. What if we make wholesale prices completely transparent? What if the wholesale price of Campbell's Chunky Soup is printed right on the label, so you can easily compare the wholesale price with the price that the store is charging and see what the markup is?

What if you or I, as lone consumers, could go to the Campbell's Soup Web site and order a can of soup for $1.00 -- the Standard Wholesale Price for the can of soup that Campbell's charges any other person or corporation? Campbell's would need to charge me postage and handling to get it to me. The bill would look like this:

  • 1 can Chunky Soup - Sirloin Burger: $1.00
  • Tax: $0.07
  • Postage: $3.00
  • TOTAL: $4.07
No one would ever buy soup like this -- the postage on a single can of soup makes it too expensive (the super-low transportation costs at retail stores is one reason why retail stores exist). That is not the point, however. The point is that every consumer can see the wholesale price and everyone in the marketplace is charged the same wholesale price. I can order one can of soup if I want and pay the postage. A mom and pop store might order several pallets of soup at that same price and pay the shipping. A large chain might order 10 truckloads every day, and it would all arrive at the corporate warehouse. The large retailer pays the same Standard Wholesale Price that Mom and Pop and I pay. The only difference in these three transactions would be the shipping cost. The wholesale price would be exposed for all to see.

If the marketplace worked this way -- as it should in a free and open society -- and if the standard wholesale price is printed on every product so we can see it, there will be a remarkable transformation in the marketplace. People will complain about markups with the same vigor that they complain about taxes today. Prices will fall.

How would we make this happen? This is simply a matter of labeling. This is no different from the law that requires food manufacturers to state nutrition information on the label. We create a law that requires all companies to offer Standard Wholesale Prices to every customer. Those standard wholesale prices are printed on the product, and they are easily available on manufacturer web sites.

Now everyone would be able see wholesale prices everywhere they go. Capitalism would work like it is supposed to, squeezing inefficiencies out of the system through competition rather than gouging customers with opaque wholesale pricing. Prices would fall, and everyone would benefit.

More Economic Thought Questions:

What if we doubled the minimum wage?

What if everyone received minimum wage?

What if we scaled fines and taxes with income?

Why do we hide wholesale prices?

What if we eliminated Landfills?



You may also enjoy this in-depth interview, "Marshall Brain on Singularity 1on1: We're approaching humanity’s make or break period":

On the coming Singularity and Artificial Intelligence:

A Conversation with Marshall Brain from MIRI on Vimeo.

See Also

About the Author
Robotic Nation
Robots in 2015
Robotic Freedom
Robotic Nation FAQ
Robotic Nation Evidence
Basic Income
Discard your body
Manna - the book
Science on the Brain
Careful Parents
Star Wars
How God Works

How to make a million dollars

Reviews
Salon
Wired
LiveScience
LATimes Editorial
Geek of the week

Thanks for visiting today,

© Copyright 2017 by Marshall Brain. All rights reserved.