Wal-Mart and Amazon compete to sell the Star Shower Motion

Star Shower Price War Shakes Up Retailers
by: Sarah Nassauer and Laura Stevens
Dec 14, 2016
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: The battle for sales of outdoor projector Star Shower Motion shows how frequent online price changes have challenged the retail industry. "The battle for Star Shower Motion sales shows how Amazon's frequent online price changes have challenged the retail industry, changing how shoppers compare prices, how traditional retailers price goods and how product manufacturers look to sell their wares. It also illustrates how Amazon is willing to give up profits on a popular item in the hope of capturing more sales from shoppers and maintaining a reputation for having the lowest prices, even if that doesn't apply to every single item."

CLASSROOM APPLICATION: The article offers three interesting points for students to examine. First, retailers sell product lines, and a retailer might lower the price of one product so as to increase the profits of another. Second, retailers compete. Therefore, one retailer, Amazon for example, lowers the price of product to increase sales of other products. However, competitors may not experience the same product complementarities. Hence, in matching Amazon's price, other retailers may be pricing suboptimally. Third, other retailers may be upset with a manufacturer for selling its product to Amazon. In turn, these other retailers may drop the product.

QUESTIONS: 
1. (Advanced) "Mr. Khubani says he worries the weekslong price war has trained some shoppers to expect to pay less for the Star Shower Motion, part of why he is rethinking his strategy for next year, hoping to keep profit margins higher." Why would a manufacturer choose not to sell its product on Amazon? Describe the tradeoff between sales and the wholesale price of the product.

2. (Introductory) Why would Wal-Mart choose to match Amazon's price for popular products, despite a small share of the retail market for the products?

3. (Advanced) "Keeping everybody happy while we are selling on Amazon has become a challenge," Mr. Khubani said. Why are manufacturers concerned about keeping resellers (i.e., retailers) of their products happy?

Reviewed By: James Dearden, Lehigh University