Holiday Price Wars

The Wall Street Journal reported on Monday 28 November 2005 that retailers in the United States were "slashing prices and offering low-cost financing on goods ranging from jewelry to laptops" (Patterson, 2005, p. 1). This behavior on the part of retail firms is occurring at the peak period of the holiday shopping season, as opposed to late in the season or the week after Christmas.

There is a microeconomic explanation for the behavior of retailers that is couched in the familiar supply and demand framework. There is a twist to the straight supply and demand relationship in the fall of 2005, however, because the chief culprit is neither consumer desires in relation to the retail products nor the prices of retail products per se. Rather, the chief culprit is the high cost of energy, especially so fuel costs for automobiles and energy costs for home heating.

Although fuel costs for automobiles appear to be moderating from the peak levels reached in October, they remain substantially higher than they were at this time last year. With respect to energy costs for home heating, the actual bills to consumers have yet to materialize, but consumer anticipations about those costs over the December-February period are a major consumer concern.

One result of the worries among consumers about energy costs is a lowering of demand for retail consumer goods. The lower demand does not mean that consumer desires f

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kely to get squeezed as price wars eat into margins already under siege from high energy costs. So investors betting that a jolly holiday-sales season will turn into lofty share-price gains for retailers may wind up with a lump of coal.
 After a post-hurricane scare that surging gasoline prices and heating bills would spook consumers during the holiday, optimism has risen, helped by a roughly 20% decline in oil prices. Since mid-October, when crude was above $60 a barrel, the Dow Jones Retail Index has climbed about 10%. Last week, the National Retail Federation nudged up its expectations for November and December year-over-year sales growth to 6% from 5%, the first time the trade group has raised its forecast in the middle of the season. But that would still fall short of last year's 6.7% gain. Holiday sales "are going to come in pretty well," says Jeff Macke, president of Macke Asset Management, a California firm that focuses on retailers. "But when they turn around and report earnings, they aren't going to be that great." It's no surprise that retailers are rolling out discounts this time of year. Many have been hard at work looking for ways to cut expenses, trim inventories and get better deals from distributors. But
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Approximate Word count = 1345
Approximate Pages = 5 (250 words per page)

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